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How do Foreign Direct Investment and Growth Interact in India?

Vol 2, Issue 2, July - December 2015 | Pages: 1-17 | Research Paper  

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Author Details ( * ) denotes Corresponding author

1. * Gurmeet Singh, Assistant Professor, Unitedworld School of Business, Gandhinagar, Gujarat, India (

The study investigates the relationships between the FDI and economic growth, namely, Gross Domestic Product, exports and foreign exchange reserves over the period 1994 to 2013. Johansen’s co-integration and vector error correction model have been applied to explore the long-run equilibrium relationship between foreign direct investment and economic growth. The analysis reveals that economic growth and the foreign direct investment are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the foreign direct investment is positively related to gross domestic product and foreign exchange reserves but negatively related to exports. Exports are found to be insignificant in determining FDI. In the Granger causality sense, FDI causes GDP in both long run and short-run. No bidirectional causality is observed between any variables under study. Furthermore, the findings of VECM and Granger Causality test show that FDI creates a long run relationship with economic growth but in short run no causality is found between FDI, exports and foreign exchange reserves.


Foreign Direct Investment, GDP, Causality Test, Co-integration Test

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