Abstract
There is an ongoing debate about the impact of inflow of Foreign Direct Investment (FDI) on economic growth in a closed country. This is mainly due to two diversified views pertaining to the relationship between FDI and economic growth. The main arguments in favour of FDI promoting economic growth are:
-
(1)
The superiority of multinational corporations (MNCs) over local firms. Output per worker in MNCs taken as a group is often many times greater than in local owned operation. Wages paid by foreign affiliates are also higher than local owned operations in both developed and developing host countries, within the same industries and the same locations.
-
(2)
A shift towards greater use of non-equity and cooperative relationships with other enterprises such as alliances, partnership, management contracts or subcontracting arrangements serve corporate objectives. They can provide better access to technologies or other assets, allowing firms to share the cost and risk of innovatory activities and can reduce the production cost of labour-incentive products.
-
(3)
Emergence of a network type of organisation expands the scope of interactions between MNCs and enterprises from host countries which will create international economic integration.
-
(4)
MNCs create an integrated international product system through FDI. This will broaden the range of resources sought by MNCs in host countries, making firms more selective in their choices. This can also encourage FDI in countries that cannot provide a wide range of resources but have some specific advantage (accounting, technology, products, etc.).
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
Blomström, M., Lipsey, R.E. and Zejan, M., ‘Is Fixed Investment the Key to Economic Growth?’, NBER Working Paper, 4436, Cambridge, MA, National Bureau of Economic Research, 1993.
—— Lipsey, R.E. and Zejan, M. ‘What Explains the Growth of Developing Countries?’, in W.J. Baumol, R.R. Nelson and E.N. Wolff (eds), Convergence of Productivity: Cross-National Studies, and Historical Evidence, New York, Oxford University Press, 1994, 243–59.
Borensztein, E., de Gregorio, J. and Lee, J.-W., ‘How Does Foreign Direct Investment Affect Economic Growth?’, NBER Working Paper, 5057, Cambridge, MA, National Bureau of Economic Research, 1995.
Cable, V. and Persaud, B., New Trends and Policy Problems in Foreign Investment: The Experience of Commonwealth Countries’, in V. Cable and B. Persaud (eds), Developing with Foreign Investment, London, Croom Helm, 1987.
Chao, C.-C. and Yu, E.S.H., ‘Foreign Capital Inflows and Welfare in an Economy with Imperfect Competition’, Journal of Development Economics, 4, 1994, 141–54.
Coe, D.T. and Helpman, E., ‘International R&D Spillovers’, European Economic Review, 39(5), 1995, 859–87.
De Mello, L.R., ‘Foreign Direct Investment-Led Growth: Evidence from Time Series and Panal Data’, Department of Economics, University of Kent at Cantebury 1996.
Dickey, D.A. and Fuller, W.A., ‘Distribution of the Estimators for Autoregressive Time Series with Unit Root’, Journal of the American Statistical Association, 74, 1979, 427–31.
—— ‘Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root’, Econometrica, 49, 1981, 1057–72.
Dunning, J.H., Studies in Direct Investment, London, Allen & Unwin, 1970.
—— Multinational Enterprises and the Global Economy, Wokingham, Addison-Wesley 1992.
Eaton, J. and Kortum, S., ‘International Patenting and Technology Diffusion’, NBER Working Paper, 4931, Cambridge, MA, National Bureau of Economic Research, 1994.
—— ‘Engines of Growth: Domestic and Foreign Sources of Innovation’, NBER Working Paper, 5207, Cambridge, MA, National Bureau of Economic Research, 1995.
Graham, E.M. and Krugman, P.R., Foreign Direct Investment in the United States, Washington, DC, Institute for International Economics, 1989.
Granger, C.W.J., ‘Investigating Causal Relations by Econometric Models and Cross-Spectral Methods’, Econometrica, 37, 1969, 424–38.
Gujarati, D., Basic Econometrics. 3rd edn, New York, McGraw-Hill, 1995.
Karikari, J.A., ‘Causality between Foreign Direct Investment and Economic Output in Ghana’, Journal of Economic Development, 17, 1992, 7–17.
Kasibhatla, K. and Sawhney B., ‘Foreign Direct Investment and Economic Growth in the US: Evidence from Co-Integration and Granger Causality Tests’, Rivista Internazionale di Scienze Economiche e Comerciali, 43(2), 1996, 411–20.
Kholdy S., ‘Causality between Foreign Investment and Spillover Efficiency’, Applied Economics, 27, 1995, 749–74.
Levine, R. and Renelt, D., ‘A Sensitivity Analysis of Cross-Country Growth Regressions’, American Economic Review, 82(4), 1992, 942–63.
Lin, A., ‘Trade Effects of Foreign Direct Investment: Evidence for Taiwan with Four ASEAN Countries’, Weltwirtshaftliches Archiv, 131(4), 1995, 737–47.
Lipsey E.R., ‘Inward Foreign Direct Investment and Economic Growth in Developing Countries’, Transnational Corporations, 9(1), 2000.
Lubitz, R. ‘United States Direct Investment in Canada and Canadian Capital Formation, 1950–1962’, PhD dissertation, Cambridge, MA, Harvard University, 1966.
Mody A. and Wang, F.-Y., ‘Explaining Industrial Growth in Coastal China: Economic Reforms … and What Else?’, World Bank Economic Review, 11(2), 1997, 293–325.
O’Sullivan, P. and Geyikdagi, Y., ‘Japanese Direct Investment in the United States’, Rivista Internazionale di Scienze Economiche e Commerciali, 9(41), 1994, 761–73.
Pfaffermayr, M., ‘Foreign Direct Investment and Exports: A Time Series Approach’, Applied Economics, 26, 1994, 337–51.
Romer, P., ‘Idea Gaps and Object Gaps in Economic Development’, Journal of Monetary Economics, 32(3), 1993, 543–73.
Root, A. and Ahmed, A., ‘The Influence of Policy Instruments on Manufacturing Direct Foreign Investment in Developing Countries’, Journal of International Business Studies, 9, 1978, 81–93.
Rugman, A. (ed), Foreign Investment and NAFTA, Columbia, SC, University of South Carolina Press, 1994.
Saltz, I.S., ‘The Negative Correlation between Foreign Direct Investment and Economic Growth in the Third World: Theory and Evidence’, Rivista Internationale di Scienze Economiche e Commmerciali, 7(39), 1992, 617–33.
Scaperlanda, A.E. and Mauer, L.J., ‘The Determinants of US Direct Investment in the EEC’, American Economic Review, 59, 1969, 558–68.
Shah, J., Tian, G. and Sen, F., ‘The FDI-Led Growth Hypothesis: Further Econometric Evidence from China’, Economics Decision Working Paper, China Economy, 1997.
Temple, J. ‘The New Growth Evidence’, Journal of Economic Literature, 37(1), 1999, 112–56.
Tsai, P.L., ‘Determinants of Foreign Direct Investment and its Impact on Economic Growth’, Journal of Economic Development, 19(1), 1994, 137–63.
United Nations, Foreign Investment and Trade Linkages in Developing Countries, New York, 1993.
Van Loo, F. ‘The Effect of Foreign Direct Investment on Investment in Canada’, Review of Economics and Statistics, 59(4), 1977, 474–81.
Verno, R., Sovereignty at Bay: The Multinational Spread of OS Enterprises, New York, Basic Books, 1971.
Zapata, H.O. and Rambaldi, A.N., ‘Monte Carlo Evidence on Cointegration and Causation’, Oxford Bulletin of Economics and Statistics, 59, 1997.
Editor information
Editors and Affiliations
Copyright information
© 2005 Palgrave Macmillan, a division of Macmillan Publishers Limited
About this chapter
Cite this chapter
Bhat, K.S., Sundari, C.U.T., Raj, K.D. (2005). The Causal Nexus between Foreign Investment and Economic Growth in India. In: Kehal, H.S. (eds) Foreign Investment in Rapidly Growing Countries. Palgrave Macmillan, London. https://doi.org/10.1057/9780230554887_9
Download citation
DOI: https://doi.org/10.1057/9780230554887_9
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-52094-7
Online ISBN: 978-0-230-55488-7
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)