The Relationship between Foreign Direct Investment and Economic Growth: A Case Study of India from 1970 to 2007

Abstract

The contentious role that foreign direct investment (FDI) plays in the development of an economy has been under much scrutiny since the Asian crisis of 1997. While one school of thought strongly believes that FDI has a positive relationship with the creation of jobs and dissemination of skills and knowledge, there are many policy makers and academics who contend that FDI crowds out indigenous enterprise and creates distortions in the economy to favor foreign investors. This paper examines the effect of foreign direct investment on economic growth in India over thirty years, both when the economy was closed and opened to foreign investors. A measure of human capital, as well as institutional quality, is included in the model.

Keywords: developing economy, foreign direct investment and growth, India foreign direct investment growth, human capital foreign direct investment, FDI

JEL Classification: F43, N15, O19, F21