Determinants of Foreign Direct Investment in India: A VECM Analysis of Economic Indicators

Imran Imran Ali, Foday Foday and Muhammad Zahid Usman

MPRA Paper from University Library of Munich, Germany

Abstract: This study investigates the complex Relationship between Foreign Direct Investment (FDI), Exchange Rates (LEXR), GDP per Capita (LGDPPC), Inflation (LINF), and Natural Resources (LNR). Understanding these dynamics is pivotal for formulating effective economic policies and enhancing economic sustainability. The primary objective is to analyze the long-term and short-term relationships among these variables and to identify their impacts on FDI. The study aims to address how each variable influences FDI and to assess the policy implications of these relationships. By Employing the Johansen Cointegration Test and Vector Error Correction Model (VECM), the study examines the equilibrium relationships and dynamics among the variables. Granger Causality tests are used to determine the predictive relationships between FDI and its determinants. The long-run analysis shows that exchange rates significantly increase FDI, while higher GDP per capita reduces FDI. Inflation and natural resources also affect FDI but to a lesser degree. Short-term dynamics reveal that GDP per capita and natural resources have significant positives impacts on FDI, whereas the effects of exchange rates and inflation are weaker. Granger Causality tests confirm that GDP per capita influences FDI and exchange rates, while inflation affects GDP per capita. The study highlights the importance of economic growth, stable exchange rates, and controlled inflation for attracting FDI. Recommendations include investing in infrastructure and innovation, managing exchange rate volatility, and implementing transparent resource management policies to enhance economic stability and growth.

Keywords: Foreign Direct Investment; Exchange Rates; GDP per Capita; Inflation; Natural Resources; Vector Error Correction Model; Cointegration; Granger Causality (search for similar items in EconPapers)
JEL-codes: F62 (search for similar items in EconPapers)
Date: 2024-08-01, Revised 2024-09-03
New Economics Papers: this item is included in nep-fdg and nep-int
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