The Effect of FDI on India and Chinese Economy: A Comparative Analysis

24 Pages Posted: 6 Feb 2008

Date Written: February 2, 2008

Abstract

India and China are the two emerging economic giants of the developing world, both situated in Asia with 37% of world population (Asian Development Outlook2005) and with more than 9% growth in their respective GDP of their economies (World Development Report 2006). China got independence in 1949, after 2 years of India's political Independence (1947), but today, China has surged far ahead of India in socio-economic development indicators. The FDI in India is just 3.4% of FDI flows as a percentage of Gross Fixed Capital Formation in India by 2004 and 5.9% of FDI stocks as a percentage of GDP by 2004, whereas in China it was 8.2% of FDI flows as a percentage of Gross Fixed Capital Formation and 34.9% of FDI stocks as a percentage of GDP during the same year.

In order to estimate the effect of FDI on economic growth the model formed is Y = A X1 a X2 b X3 y X4 x. The 't' ratio for the constant (a), GDI(x1), HC (x3), LF (x4) all are greater than two implying the strong significance of these variables on the GDP, but FDI is showing positive, but not relatively significant effect on GDP. The R2 for the model as a whole is 0.93, the F value is significantly high revealing the significance of the fitness of the model. The D-W Statistics for the model is 1.825 revealing, the problem of auto-correlation has been fairly solved. The model shows that 1 percent increase in GDI leads to increase in GDP by all most 0.5 percent. The 1% increase in FDI brings about an increase in GDP by 0.12 percent. The coefficient for human capital is 0.34 percent and that of the labour force is 0.7 percent. Thus GDI and HC significantly affect the GDP. However the coefficient of FDI though not significant as other variables in the study, is positive.

Keywords: FDI, India, China, GDP, Growth rates, Poverty, Trade, hard and soft environment, policy changes, NRI, NRC

JEL Classification: F2, P52

Suggested Citation

Keshava, Shanthappa Rathnamma, The Effect of FDI on India and Chinese Economy: A Comparative Analysis (February 2, 2008). Second Singapore International Conference on Finance 2008. Available at SSRN: https://ssrn.com/abstract=1089964 or http://dx.doi.org/10.2139/ssrn.1089964

Shanthappa Rathnamma Keshava (Contact Author)

Bangalore University ( email )

Bangalore, Karnataka 560056
India
+91-0-9480 584 544 (Phone)

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