Foreign direct investment and growth in India

A cointegration approach

Chandana Chakraborty, Parantap Basu

Research output: Contribution to journalArticleResearchpeer-review

127 Citations (Scopus)

Abstract

The two-way link between foreign direct investment and growth for India is explored using a structural cointegration model with vector error correction mechanism. The existence of two cointegrating vectors between GDP, FDI, the unit labour cost and the share of import duty in tax revenue is found, which captures the long run relationship between FDI and GDP. A parsimonious vector error correction model (VECM) is then estimated to find the short run dynamics of FDI and growth. Our VECM model reveals three important features: (a) GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI; (b) trade liberalization policy of the Indian government had some positive short run impact on the FDI flow; and (c) FDI tends to lower the unit labour cost suggesting that FDI in India is labour displacing.

Original languageEnglish
Pages (from-to)1061-1073
Number of pages13
JournalApplied Economics
Volume34
Issue number9
DOIs
StatePublished - 1 Jan 2002

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India
Foreign direct investment
Cointegration
Unit labour costs
Vector error correction model
Short-run
Trade liberalization
Error correction mechanism
Vector error correction
Import
Long-run relationship
Labor
Tax revenues
Government
Causality

Cite this

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Foreign direct investment and growth in India : A cointegration approach. / Chakraborty, Chandana; Basu, Parantap.

In: Applied Economics, Vol. 34, No. 9, 01.01.2002, p. 1061-1073.

Research output: Contribution to journalArticleResearchpeer-review

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