Does outward foreign direct investment crowd out domestic investment in India?

Padmaja M ()
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Padmaja M: National Institute of Technology Tiruchirappalli

Economics Bulletin, 2023, vol. 43, issue 1, 526 - 536

Abstract: This study examines the long-run effect of outward foreign direct investment (outward FDI) on domestic investment in India using the time series framework over the period 1982-2017. Gross domestic savings, real economic growth, trade openness, real interest rate and financial development are further included as control variables in domestic investment function. The results using the ARDL model indicate that outward foreign direct investment, gross domestic savings and real economic growth significantly promote domestic investment in India, whereas real interest rate significantly deteriorates it. Trade openness and financial development are not effective in enhancing domestic investment in India. However, outward FDI unidirectionally causes India's domestic investment in the long-run. The finding shows that Outward FDI stimulates domestic investment and thus support “crowd-in-hypothesis”. On the policy ground, it urges the Indian government to push outward foreign direct investors for the long-run benefit of the domestic investors.

Keywords: Outward foreign direct investment; domestic investment; ARDL model; Open economy macroeconomics (search for similar items in EconPapers)
JEL-codes: E2 F2 (search for similar items in EconPapers)
Date: 2023-03-30
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