Macroeconomic Determinants of Foreign Direct Investment in India: An Empirical Investigation (1991–2012)

Abstract

The paper has made an empirical investigation into some of the macroeconomic determinants of Foreign Direct Investment (FDI) inflows into India. Time series data over the period 1991 to 2012 has been used for the purpose and Gross Domestic Product (GDP), Consumer Price Index (CPI), Trade Openness (TO), Exchange Rate (ER), Foreign Exchange Reserve (FOREX) and Gross Domestic Capital Formation (GCF) are considered as the determinant variables of Foreign Direct Investment (FDI) inflows into the country. Multivariate linear regression has been used as an analytical model for studying the relationships between the explained and the explanatory variables. The Ordinary Least Squares (OLS) results suggest that Foreign Exchange Reserves (FOREX), Inflation (CPI) and Gross Capital Formation (GCF) are the significant explanatory variables of FDI inflows in to India over the years. Further, it is revealed that FOREX and CPI contribute positively to FDI inflows and the relative importance of the former is higher than the later. The variable GCF was found to have a negative bearing on FDI inflows into the country. Though the variables Gross Domestic Product, Trade Openness and Exchange Rates have positive impacts on FDI inflow, they did not appear to be significant in the regression model.