THE IMPACT OF FDI IN A DEVELOPING

COUNTRY (INDIA) A THEORITICAL ANALYSIS

6/8/2015

RABINDRA BHARATI UNIVERSITY

POOJA SENGUPTA

ECONOMICS DEPARTMENT (2ND SEMESTER)

CLASS ROLL NO. – 06

UNIVERSITY ROLL NO. – RAB/ECOS/145024

PRESENTED TO MR.KAUSHIK GUPTA (H.O.D)

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CONTENTS

1. ABSTRACT

2. INTRODUCTION

3. LITERATURE REVIEW

4. ECONOMIC MODEL

5. DATA AND APPROACH

6. CONCLUSION

7. APPENDIX

8. REFERENCES

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1. ABSTRACT

Foreign Direct Investment (FDI) has appeared to be the most important source of

external flow of resources to the developing countries and has become an integral part of

capital formation. This paper discusses the impact of FDI on the economy of developing

countries and its overall significance in the economy of developing countries. With the

initiation of globalization, developing countries, particularly those in Asia, have been

witnessing an immense surge of FDI inflows during the past two decades. Even though India

has been a latecomer to the FDI scene compared to other East Asian countries, its

considerable market potential and a liberalized policy regime has sustained its attraction as a

favourable destination for foreign investors. This paper tries to find out how FDI is seen as an

important economic catalyst of Indian economic growth by stimulating domestic investment,

increasing human capital formation and by facilitating the technology transfers. The main

purpose of the study is to investigate the impact of FDI on economic growth in India.

JEL CLASSIFICATION NUMBERS: F210

KEYWORDS: TECHNOLOGY SPILL OVER, MULTINATIONAL CORPORATION,

FOREIGN DIRECT INVESTMENT, ECONOMIC GROWTH

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2. INTRODUCTION.

The developing countries suffer from shortage of capital and there are various debates

among economists regarding the significance of foreign direct investment (FDI) which is

referred as the investments made by residents of a country in the financial assets and

production process of another country. FDI is being sought by many developing and

emerging nations as a means to complement their level of domestic resources as well as

securing economy wide gain through technology transfer, access to foreign market,

increasing employment opportunities and improving living standards. Hence policymakers

and economists are advising the government of developing nations to open up the

economy and to integrate more with the world economy so as to achieve their own

domestic objectives. Thus, the developing countries are creating a climate favourable for

FDI inflows and hence bring in new managerial, production and market technologies so

that the developing countries existing comparative advantage can be fully maximised.

Keynes in 1933 quoted that: ‘I sympathise with those who would minimise, rather than

with those who would maximise economic entanglement among nations. Ideas,

knowledge, science – which should of their nature, are international’.

Most of the developing nations have accumulated a huge amount of external debt while

meeting their own national objectives. These knowledge capital and technology deficient

economies are now welcoming foreign capital inflows to fill the domestic-saving

investment gap, foreign exchange gap and human capital gap so that it can act as a catalyst

for development. When rich nations invest in capital deficient economies of the world they

take advantage of the cheap labour that is available in the developing countries while

producing labour-intensive goods. Unlike advanced nations, developing countries lack in

technological know-how and there is an immediate urge to strengthen their industrial and

manufacturing sector through training and research programs in the country. The

developing nations do not have necessary technical skill and expertise to exploit the huge

mineral resources that they possess and hence for the exploitation of their mineral wealth,

foreign resources must flow from rich to poorer nations. Developing nation’s inadequate

infrastructure requires sufficient foreign capital to undertake the task of developing

transport and communications, generation of electricity etc.

The role of FDI is ultimately to increase the growth potential of the developing nations

and as De Gregorio said that: ‘by increasing capital stock, FDI can increase country’s

output and productivity through a more efficient use of existing resources and by

absorbing the unemployed resources’. Other role of FDI is to increase the market size of

the developing nations and also to produce value added goods. Thus FDI in this globalised

economy play a very important role by upgrading the industrial base and the human

capital of the developing nations. The capital inflow is not only directed to the high-tech

activities of the developing nations but also to the other sectors which include traditional

activities and services. The positive benefits of FDI have led many countries in the 60s,

70s, 80s and 90s to liberalise their economy. However, according to UNCTAD some

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countries attracted large FDI flows, where as others were less successful in doing so even

though they had liberalised FDI regimes.

The remaining part of the paper is divided into 3 sections. The first section provides

theoretically the literature review which discusses various issues regarding foreign capital

inflows in developing nations. The second section consists of a model which tries to

explain how growth occurs through technological spill over in a home country. The last

section consists of data and methodology on FDI in developing country.

OBJECTIVES OF THE PAPER

This paper tries to study the inflow of foreign capital in India and using the secondary

data collected from RBI and WORLD BANK websites it examines and analyses their flow

in India and also their impact on Indian economy. Moreover a simple economic model has

been set up to show how technological gap creates spill over in a developing country.

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3. LITERATURE REVIEW

This section provides a vast literature on the impact of foreign capital inflow on growth,

welfare, income inequality, wage gap, child labour. The effects of foreign capital inflow in

the developing countries have been intensively investigated from both the trade and

development theorists. This paper theoretically surveys the impact of foreign capital

inflow in developing economies.

FOREIGN CAPITAL INFLOW AND WELFARE

The literature review on the role of foreign capital inflow is quite extensive. Many

economists view that the foreign capital inflow in the form of foreign direct investment

has contributed to technology transfer in many emerging and developing economies and

has grabbed the eyeballs of academician as well as policy makers. Others argued that the

role of foreign capital in promoting economic growth has sometimes been exaggerated.

Singer (1950) argued that foreign capital inflow has not helped much in the

industrialisation of developing nations but it has exploited the developing nation natural

resources for the benefit of the foreign investing nations. Brecher-Alejandro (1977) have

analysed the welfare effects of foreign capital inflow in a two-commodity, two-factor full

employment model. The result shown is that foreign capital inflow with full repatriation of

its earning reduces social welfare if the import-competing sector is capital-intensive and is

protected by a tariff. However in the absence of any tariff, the inflow of foreign capital

with full repatriation of its earnings does not affect the social welfare. Hence welfare is

defined as a positive function of national income. The well-known Brecher-Alejandro

proposition is examined by Jones (1965) using the Hecksher-Ohlin Samuelson type of

structure. The pioneering works of Jones assumed a small open economy where the prices

of the product are internationally given and the production function exhibits constant

returns to scale. The capital and labour are mobile between the capital intensive

manufacturing sector and labour intensive agricultural sector. The labour and capital stock

are fully utilised. Jones also assumed that the manufacturing sector is the import

competing sector and is protected by tariff where as the product of agricultural sector is

exported. Jones showed that as a result of inflow of foreign capital in a small open

economy where the manufacturing sector is expanding and it is protected leads to decline

in the value of domestic output which is treated as social welfare. However inflow of

foreign capital in the absence of tariff leads to no change in welfare.

Corden-Findlay (1975) model presents that inflow of foreign capital leads to urban

employment. He examines the Brecher-Alejandro proposition in terms of a two sector

Hecksher-Ohlin type of employment model. It is assumed that the wage rate in the urban

sector is fixed and it is higher than the equilibrium wage rate. Workers will migrate from

the rural sector to the urban sector so long as the urban wage rate is higher than the rural

wage rate. Here the urban sector is more capital intensive than the rural sector. This model

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is same as the Jones model and the only exception is that urban unemployment is included

in the model. Hence the Brecher-Alejandro proposition remains valid in this model even if

it includes urban unemployment. Khan (1982) has re-examined the Brecher-Alejandro

proposition using a mobile capital ‘Generalised Harris-Todaro’ model with urban

unemployment in a small open economy. He has reached the same conclusion as that of

Brecher-Alejandro. Gupta (1994) however objected social welfare to be considered as

identical to national income. Gupta showed that there is a positive degree of inequality in

the income distribution of workers and he has included the Gini coefficient of income

distribution in his model. Hence he has shown that in a small open economy inflow of

foreign capital worsens the income distribution and lowers the social welfare in the

absence of tariff, if the urban sector is more capital intensive than the rural sector. In his

model, he explained the Corden-Findlay model and he considered three different income

groups among the workers in the society like urban sector workers, rural sector workers

and the unemployed. He assumes that the workers are the owners of domestic capital and

there is perfect equality in the distribution of capital stock. Domestic capital and foreign

capital being perfect substitutes, his model tries to find out what happens when there is full

repatriation of foreign capital income in the absence of tariff. Gupta (1994) showed in his

model that Gini coefficient of income distribution is used to measure the social welfare of

worker, hence inflow of foreign capital increases the frequency of earning high wage rate

and reduces the frequency of earning low wage rate and hence Gini coefficient increases.

As the foreign capital income is fully repatriated per capita income does not change with

change in foreign capital. Hence foreign capital inflow is immiserizing in the absence of

tariff.

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FOREIGN CAPITAL INFLOW AND INCOME INEQUALITY

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FOREIGN CAPITAL INFLOW AND WAGE INEQUALITY

In the presence of trade liberalisation, many researches have been conducted to analyse the

skilled-unskilled wage gap. The most important works are by Robbins (1994a, 1994b,

1995a, 1995b, 1996a, 1997b), Wood (1997), Acharyya and Marjit (2000), Ghosh and

Gupta (2001), Marjit and Acharyya (2003) etc. Broadly speaking, there are two opposite

views on the impact of terms of trade on skilled-unskilled wage gap. One view is that in a

developing economy an improvement in terms of trade reduces the skilled-unskilled wage

gap. The other view is that an improvement in terms of trade widens the skilled-unskilled

wage gap.

The most important concern of the developing countries are the issue of inequality as it

halts the growth of developing nations leading them to remain stuck in low level

equilibrium (Banerji and Newman 1923). The growing liberalisation in developing

countries created lot of concern for these developing nations which exhibits large

agricultural sector, large informal sector, lack of capital, non-traded activities etc

(Acharyya and Marjit 1999). Most economists have founded out that the increasing wage

gap in developing countries is mainly due to abundance of unskilled workers. Many

researchers indicate that the trade patterns of the developing countries are diverse and they

export both skill-intensive manufacturing goods and unskilled labour intensive agricultural

products. Such co-existence of organised and informal sector in developing countries and

engaging themselves in the production of non-traded goods are capable of explaining the

skilled-unskilled wage gap in developing countries. In developing countries informal

sector provides most of the employment and its share in terms of employment is

increasing for the past few years (Majumdar 1983, 1993). Large part of the developing

country market is occupied by the non-traded goods which extensibly uses unskilled

labour. Hence in order to explain the skilled unskilled wage gap, it is important to take

into account the non-traded goods produced by the unskilled labour abundant developing

country. Acharyya and Marjit (1999) considered the nature of the non-traded sector. In

particular, the main concern is whether non-traded production is organised in the informal

sector or in the formal sector. In developing countries the traded sectors compete with the

non-traded for scarce resources and the non-traded must match its domestic demand. Now

trade liberalisation increases the activities in the traded sector and this increase will only

be possible if there is a fall in the demand for non-traded goods. This increases the price of

non-traded goods and consequently it changes the developing country’s income

distribution. However if the non-traded goods is produced in the formal sector with

contractual wage then the non-traded goods price will be determined by the cost of

producing the non-traded independent of the demand for non-traded goods. In such cases,

demand variation and consequently trade liberalisation will change only the non-traded

goods production. But if the non-traded goods are produced in the informal sector then

demand variation followed by trade liberalisation will affect not only the production of

non-traded goods but also the income distribution through changes in the price of non-

traded goods. Acharyya and Marjit (2003) stated that wage gap is more pronounced under

trade liberalisation when non-traded goods are produced in the informal sector. Majumdar

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(1993) indicated that unskilled worker cannot afford to remain unemployed for a long

period. Hence unskilled worker who cannot find any job in the urban sector at given

money wage move to the rural sector even at a lower wage. Thus the wage gap is huge in

developing nations.

FOREIGN CAPITAL INFLOW AND CHILD LABOR

Recent years eradication of child labour has grabbed the attention of the policy makers of

developing countries, particularly in the context of the relationship between international

trade and labour standards as mentioned by the World Trade Organization (WTO). The

data published by International labour organisation indicates that the participation rate for

children aged 0-14 is very high in developing countries. In most of the developing

countries children are engaged in agricultural activities and the remaining workforce is

engaged in informal manufacturing sector. The cause behind children working at a very

young age is poverty. World Development Report (1995) also recognizes poverty as the driving

force behind the flow of child labour to the job market. One important feature of most of the

developing countries is the existence of a widespread informal sector within the economy.

The workers associated with the informal sectors are mainly unskilled and are poor as on

an average they earn a wage rate that is close to the subsistence level. As a result of this

the workers of this sector are compelled to send their children to look for employment.

Sugata Marjit and Kaushik Gupta paper indicates that informal sector acts as a reservoir of

child labour. This has been supported by authors like Grootaert (1998) and Ray (1999).

Basu and Van (1998) in their paper have shown that the incidence of child labour is

mainly due to unfavorable adult labor market resulting in a low adult wage rate. There are

two opposite views regarding the impact of trade openness and foreign capital inflow on

child labor. One view says that foreign capital inflow increases the incidence of child labor

whereas the other view concludes exactly the opposite. Authors like Grootaert and Kanbur

(1995), Rodrik (1996), Swaminathan (1998) etc. have argued that trade openness and

foreign capital inflow promotes child labor whereas authors like Spar (1998), Cigno,

Rosati and Guarcello (2002), Neumayer and De Soya (2005), etc. have argued for the

opposite case. The negative impact of foreign capital inflow on the incidence of child

labor the negative impact of foreign capital inflow on the incidence of child labor the

intuitive argument is that such an inflow causes formal sectors to expand at the cost of

informal sectors. As the informal sector acts as a reservoir for child labor one can say its

contraction reduces the supply of child labor is that such an inflow causes formal sectors

to expand at the cost of informal sectors. As the informal sector acts as a reservoir for

child labor one can say its contraction reduces the supply of child labor. Basu and Van

(1998) clearly indicates that the wage of the adult unskilled worker must increase to lower

the incidence of child labour. Unlike the unskilled adult worker the wages of highly

skilled adult worker is very high and there is no need to send their children to work. Thus

in developing nations wages all around should improve.

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FOREIGN CAPITAL INFLOW AND TECHNOLOGY TRANSFER

Technological transfer takes place through FDI and the works of Koizumi and Kopecky

(1977) stated that as a result of FDI residents of the home country come into contact with

foreign entrepreneurs who possesses superior technical skills and know-how. These new

ideas lead to technology transfer from the foreign country to the residents of the home

country and it takes place through observation, discussion and training. As far as the home

country is concerned the transmission of technical knowledge can be viewed as spill over.

Technology transfer is viewed as taking place either by reverse engineering via purchase

of imported products/inputs or by training of local workers who move out of the MNC to

domestic firms or start their own units (see, Fosturi, Motta, Ronde, 2001). It is said that

competition from the foreign firms forces rival domestic firms to improve their production

technique to keep their market share. When the technology and knowledge is transferred

from the parent firm to their local affiliates, it leaks to the home country firms (Sjoholm)

and thus enhances their productivity. Hence, changes in a firm‘s factor productivity’ acts

as a proxy for technology transfer (Haddad and Harrison, 1992). In firm and industry

specific issues the focus is on the absorptive capacity and technology base of a firm. It is

argued that the pace of technology transfer is a function of the technology gap between

domestic and foreign firms. Thus Findlay (1978) argued that the greater the technology

gap the greater the technology transfer, a sort of catch up effect will take place in home

country. Moreover, the ability of the home country to absorb new technology depends on

the quality of human capital available in the home country. In particular, extreme

deficiency in the home country’s knowledge capital or human capital prevent learning so

that a technology gap implies that only lower quality technology can be supplied to home

country firms (Glass and Saggi, 1998). A large gap also makes the cost of learning

prohibitively high for home country firms (Girma, 2005). Another important factor is the

dependence of technology spillover on the absorptive capacity of the home country firms

and studies indicate that the spillover is a function of the extent of the technology gap

between domestic and foreign firms. Evidence of spillover seems to exist in the case when

the absorptive capacity exists, that is, the technology gap between domestic and foreign

firms is not too high. Studies also indicate that spill over depends on the R&D capability

of domestic country.

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4. Model on FDI and Domestic country Economic growth (focusing on growth

resulting from TECHNOLOGICAL SPILLOVER from Foreign to Home

country)

The objective is to model how FDI inflows can generate spill over in the home country

thus improving the conditions for economic growth. There are two countries home and

foreign and FDI flows from foreign firm in foreign country to domestic firm in home

country.

The home country capital stock consists of foreign capital as well as domestic

capital. Therefore the home country’s stock of capital can be expressed as:

KHC = KDOM + KFOR……………………………… (1)

Where, KDOM is the domestic capital and KFOR is the foreign capital.

The question arises as to how the home country’s stock of cap gets affected when foreign

firm invests in the home country. The question also arises whether the foreign investments

and domestic investments are complements or substitutes. These two alternatives are

plausible. But FDI inflows in the form of MNC (Multinational Corporation) would

increase the home country’s capital stock through an increase in KFOR if and only if the

two investments are complement. Thus the complementary relationship between the

domestic and foreign investments has a potential to affect the home country’s economic

growth through an additional increase in home country’s stock of capital.

Let’s assume that the foreign country possesses a technology which is superior

to the technology available in the home country. Say that the level of technology

possessed by foreign firm is AFOR and the level of technology possessed by domestic firm

in home country is ADOM. Based on the above assumption it can be written that:

AFOR > ADOM…………………………….. (2)

At time‘t’ of investment the foreign firm has technological advantage over domestic firm

in home country and it is simply written as:

P = AFOR t – ADOM t > 0……………………. (3)

Where P is the difference between the level of technology of foreign and domestic firms.

Now, let α be the ‘size of technology leakage’ and it is between the range 0 and 1(0≤α≤1).

Here technology leakage means that the foreign firm technology being revealed in the

home country as a result of its operation in the home country. If the foreign firm is

successful in preventing technological leakage in home country then α is close to 0.

However when technology leakages are large then α is close to 1. A technological leakage

will result in spill over of technology only when the domestic firm in home country has

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successfully adopted the foreign firm technology. This adoption of foreign firm

technology is known as the ‘absorptive capacity’. Absorptive capacity means that

technological spill over will take place if the domestic firm in the home country has the

ability to adopt the technology leakage. Let β be the absorptive capacity of the domestic

firm in home country and it is between the range 0 and 1(0≤β≤1). When the absorptive

capacity is high then β is close to 1 and when the absorptive capacity is low then β is close

to 0.

Technology spill over is determined by the size of foreign firm’s technological advantage

over domestic firm, the size of technological leakage and the absorptive capacity of

domestic firm in home country. This is expressed by equation (4):

ADOM t+1 = α*βDOM t (AFOR t – ADOM t) …………………….. (4)

Equation (4) says that technological spill over is positively related size of technological

leakage, domestic firm absorptive capacity and technological advantage of foreign firm

over domestic firm.

In equation (4), the threshold concept is taken into account. No technological spill over

will take place if the absorptive capacity of domestic firm in home country is below a

minimum level. Therefore equation (4) is made conditional on the following expression:

β≥ βTHRESHOLD …………………………………………… (5)

Technological spill over is maximised as long as the domestic firm in the home country

has achieved the threshold level of absorptive capacity.

The home country’s production function is shown by equation (6) which describes how

FDI inflows can affect home country’s economic growth.

YHC = F(AHC(KHC,LHC),KFOR,KKFOR) ……………………….. (6)

YHC = Production function of home country

AHC= the level of technology possessed by the home country

KHC & LHC = stock of domestic capital and labour in the home country

KFOR = stock of foreign capital

KKFOR = knowledge capital foreign firm

In equation (6), knowledge capital of foreign firm is entered as an additional input in the

home country’s production function. Foreign firms bring a large amount of knowledge

capital (KKFOR) with them that generate spill over in the home country which allow KKFOR

to affect the level of technology of the home country (AHC). This spill over basically

improves the home country’s level of technology(AHC) and result in a more efficient use of

home country’s stock of capital and labour as shown in equation (6). The implication of

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this model: as long as equation (2) and (5) holds technological spill over will take place

from foreign firm in foreign country to domestic firm in home country.

Basically, the level of technology and the absorptive capacity affect the growth enhancing

potential of FDI resulting from technological spill over.

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5. DATA AND APPROACH

Secondary data has been collected to observe the FDI inflows in India from 2004-05 to

20011-12 and the data collected shows that there has been an increase in FDI inflows from

2004-05, however in 2010-11 there has been a decline FDI inflow and in 2011-12 the inflows

maintained their momentum. According to the UNCTAD World Investment Report 2011,

India has emerged as an important FDI destination in recent years. India’s share in global FDI

flows increased from 1.3 percent in 2007 to 2.0 percent in 2010. The welcoming attitude

shown by India post-liberalisation suggests that India as an emerging country has understood

that FDI inflows can improve the growth prospects of India.

SOURCE: RBI, WORLD BANK FIGURE 1

In Table 1 and in figure 2 it shows that a substantial proportion of FDI has gone to the service

sector followed by construction development, telecommunication, computer software and

hardware, drugs and pharmaceuticals. Since the onset of liberalisation, the country

experienced a high jump in the inflows of FDI in service sector because of the tremendous

growth potential that it possesses. Services sector puts the Indian economy on a proper glide

path. It is among the main drivers of sustained economic growth and development by

contributing significant share in GDP. The computer hardware and software industry has

witnessed a high growth since 2004-05. Establishment of software technology parks,

regulatory reforms by the Indian government, the growing Indian market and availability of

skilled work force have been important factors in boosting FDI inflows to this sector in India.

The telecommunication sector in India is growing at an astonishing pace. India has more than

125 million telephone networks, which is one of the largest communication networks across

the globe. FDI in telecommunication sector has been rising tremendously recently. Telecom

industry which comprises of telecommunication, cellular mobiles and basic telephone

services has ranked among the top ten sectors in attracting FDI since 1991.

0

50000

100000

150000

200000

FDI inflows(in Rs crore)

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sector fdi inflows in Rs crore

service 185569.7

construction and development108557.5

telecommunication66719.51

computer software and hardware59670.51

drugs and pharmaceuticals56070.29

TABLE 1 SOURCES: RBI (FIGURES IN Rs crores)

Figure 2 SOURCES: RBI

Now I have used another table to show the relationship between FDI and openness index.

Openness index is measured by:

. Higher the openness index higher

will be the FDI flows and this is shown in table 2. I have used correlation to find out the

association between FDI (X) and GDP (Y) at current prices. The result of correlation analysis

is 0.84489 which is positive. The favourable condition that has worked for an emerging

country like India is the extent of openness and hence openness index is crucial for FDI

flows. In India most of the FDI flows take place in the form of MNCs, acquisition and

mergers. And these foreign capital inflows accelerated India’s growth through

modernasitation of undercapitalised operation. Moreover intensifying competition and proper

transfer of technology has upgraded India’s service sector including the financial services and

this is reflected on India’s growth since liberalisation

0

20000

40000

60000

80000

100000

120000

AMOUNT OF FDI INFLOWS (IN RS CRORES

AMOUNT OF FDI INFLOWS (IN RS CRORES

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year EXPORT(in Rs crore)IMPORT(in Rs crore)GDP at current price(in Rs croreFDI inflows(in Rs crore)OPENNESS INDEX

2004-05 375340 501065 2971464 14653 29.49405

2005-06 456418 660409 3390503 24584 32.93986

2006-07 571779 840506 3953276 56390 35.72442

2007-08 655864 1012312 4582086 98642 36.40648

2008-09 840755 1374436 5303567 142829 41.76795

2009-10 845534 1363736 6108903 123120 36.16476

2010-11 1142922 1683467 7248860 97320 38.99081

2011-12 1459281 2344772 8391691 165146 45.33119

TABLE 2 (FIGURES IN Rs crores) SOURCES: UNCTAD

ANALYSIS

An emerging country like India lack in R&D and hence in order to take advantage of the

foreign resources India has further liberalised its economy in 2005. Hence the aim of India is

to integrate with the world and enjoy the benefits of international trade as it is capable of

transferring technology and valuable capital. Hence India will be able to gain by fostering

growth and development. Moreover India is being able to provide the world huge domestic

market, low cost of labour, cheap and skilled labour, high returns of investment, and hence

India is posing a significant impact on the world economy, mainly in the economics of the

industrialized states. The ease of doing business in India, favourable environment developed

for doing business in some parts of India has attracted foreign firms mainly from Eastern

Asia and USA and since they are being able to earn profits it is motivating them to reinvest in

India. India since liberalisation strongly focussed on the quality of FDI and the major concern

regarding FDI inflow is that some of it crowds out domestic investment i.e. relocates or

decreases it. FDI’s share on economic growth has mainly happened due to positive effects

that have been caused by technology transfer, employee training, and international production

networks. India generally focuses on export-oriented FDI that minimises the possibility of

crowding out of domestic investment by creating demand for intermediate goods. Indian

government intervene when foreign enterprises start business in India so that it may foster

diffusion of knowledge. India is trying hard to attract knowledge base activities such as

software development and R&D activity. Hence India is investing in these section and they

are innovatively formulating their plans and policies to get most benefit from globalisation.

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6. CONCLUSION

FDI acts as a strategic component of investment and this is needed by India for its sustained

economic growth and development through creation of jobs, expansion of existing

manufacturing industries, short and long term project in the field of healthcare, education,

research and development (R&D), etc. I have tried to explain theoretically and with the help

of economic model the positive relationship between FDI and economic growth. My main

focus is on Indian economy and how India has tried to remain on a higher growth trajectory

by attracting huge amount of foreign capital inflows in service sector and other high tech

activities operating in the economy. Globalization has made many of the impossible the

possible one, say an emerging country like India lagging in certain aspect can adopt its

availability from another country across the border, and India lacking in financial facility will

now grow and develop themselves with the constant and a positive help of investment made

from the developed countries on their will towards India to assist her in any terms and at the

same time to fetch out the benefits which will make her more stronger and stable in the global

market. However India lags behind other emerging economies in terms of attracting huge FDI

flows and if India successes in attracting huge foreign capital inflows then only it will be able

to accelerate the accumulation of the country’s capital stock which is low compared to

developed countries, and it will also be able to set the stage for the progressive structural

transformation of the country’s economy from a largely agriculture-based economy to a

growing economy (since large part of the population is employed in agricultural sector) with

expanding industrial and service sectors, capable of absorbing the existing labour surplus and

of reducing unemployment and poverty by improving the living standards of its people. Apart

from focussing on creating innovative policies India needs to focus on developing sound

institutions which is prerequisite for attracting FDI.

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7. APPENDIX

LIST OF TABLES AND FIGURES

TABLE 1 : TABLE 1 SHOWS THE FDI INFLOWS IN INDIA IN FIVE SECTORS

TABLE 2 : TABLE 2 SHOWS EXPORTS, IMPORTS, GDP AT CURRENT

PRICES, FDI INFLOWS AND OPENNESS INDEX OF INDIA FROM THE YEAR

2004-05 TO 2011-12

FIGURE 1: FIGURE IS A LINE GRAPH SHOWING FDI INFLOWS IN INDIA IN

DIFFERENT YEARS

FIGURE 2: FIGURE 2 IS A BAR DIAGRAM SHOWING FDI INFLOWS IN

DIFFERENT SECTORS

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8. REFERENCES

Acharyya, R. and S.Marjit. 2000. ‘Globalisation and Inequality- An Analytical

Perspective’, Economic and Political Weekly 35:39, pp. 3503-3510.

Gupta, K. and M.R. Gupta ‘Foreign Capital and Economic Development: A Brief

Survey’, pp. 465-500.

Marjit, S. and K.Gupta ‘International Capital Mobility and Child Laboor’.

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