The main objective of this paper is to examine the long-run relationship of Foreign Direct Investment (FDI) with the Gross Output (GO), Export (EX) and Labour Productivity (LPR) in the Indian economy at the sectoral level by using the annual data from 1990-91 to 2000-01. The study uses the Panel co-integration (PCONT) test and the results demonstrate that the flow of FDI into the sectors has helped to raise the output, labour productivity and export in some sectors but a better role of FDI at the sectoral level is still expected. Results also reveal that there is no significant co-integrating relationship among the variables like FDI, GO, EX and LPR in core sectors of the economy. This implies that when there is an increase in the output, export or labour productivity of the sectors it is not due to the advent of FDI. Thus, it could be concluded that the advent of FDI has not helped to wield a positive impact on the Indian economy at the sectoral level. Thus, in the eve of India's plan for further opening up of the economy, it is advisable to open up the export oriented sectors so that a higher growth of the economy could be achieved through the growth of these sectors.
1 I would express my appreciation to Dr Peter Pedroni who provided advice and suggestions in the estimations of the model.
2 Dr Maathai K. Mathiyazhagan a Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be contacted at [email protected].
1. Introduction
Foreign Direct Investment (FDI) inflow into the core sectors is assumed to play a vital role as a source of capital, management, and technology in countries of transition economies. It implies that FDI can have positive effects on a host economy’s development effort (Caves, 1974; Kokko, 1994; Markusen, 1995; Carves, 1996; Sahoo, Mathiyazhagan and Parida 2001). On this line, it has been argued that FDI can bring the technological diffusion to the sectors through knowledge spillover and enhances a faster rate of growth of output via increased labour productivity in India. There were also few evidences demonstrate that there is a long-run relationship between Gross Domestic Product, FDI and export in India (Sahoo and Mathiyazhagan, 2003). In fact, many countries like India have offered incentives to encourage FDI to their economies. India is also opened up its economy and allowed MNEs in the core sectors such as Power and Fuels, Electrical Equipments, Transport, Chemicals, Food Processing, Metallurgical, Drugs and Pharmaceuticals, Textiles, and Industrial Machinery as a part of reform process started in the beginning of 1990s. In this context, it is imperative to assess the impact of FDI inflows in to these core sectors in India. It is also motivated by recent political developments in India following the opening of sectors like insurance and telecommunication with increased financial gap for the private players. In particular, the left parties, who are main coalition partner of the present government in India is not in favor of increased financial gap to the private players in the sectors of insurance and telecommunication and also disinvestment of public enterprises. An empirical analysis could offer a basis for the further opening up the economy if FDI inflows into the core sectors set a positive spillover in the economy in India.
Finally, the analysis is also motivated by the current worldwide trend towards assessing the impact of FDI on the core sectors of the economy in transition countries. The evidence to date on this issue is mixed. The positive merits of the FDI inflows in the host economy in practice have begun to be questioned.
1 I would express my appreciation to Dr Peter Pedroni who provided advice and suggestions in the estimations of the model.
2 Dr Maathai K. Mathiyazhagan a Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be contacted at [email protected].
1. Introduction
Foreign Direct Investment (FDI) inflow into the core sectors is assumed to play a vital role as a source of capital, management, and technology in countries of transition economies. It implies that FDI can have positive effects on a host economy’s development effort (Caves, 1974; Kokko, 1994; Markusen, 1995; Carves, 1996; Sahoo, Mathiyazhagan and Parida 2001). On this line, it has been argued that FDI can bring the technological diffusion to the sectors through knowledge spillover and enhances a faster rate of growth of output via increased labour productivity in India. There were also few evidences demonstrate that there is a long-run relationship between Gross Domestic Product, FDI and export in India (Sahoo and Mathiyazhagan, 2003). In fact, many countries like India have offered incentives to encourage FDI to their economies. India is also opened up its economy and allowed MNEs in the core sectors such as Power and Fuels, Electrical Equipments, Transport, Chemicals, Food Processing, Metallurgical, Drugs and Pharmaceuticals, Textiles, and Industrial Machinery as a part of reform process started in the beginning of 1990s. In this context, it is imperative to assess the impact of FDI inflows in to these core sectors in India. It is also motivated by recent political developments in India following the opening of sectors like insurance and telecommunication with increased financial gap for the private players. In particular, the left parties, who are main coalition partner of the present government in India is not in favor of increased financial gap to the private players in the sectors of insurance and telecommunication and also disinvestment of public enterprises. An empirical analysis could offer a basis for the further opening up the economy if FDI inflows into the core sectors set a positive spillover in the economy in India.
Finally, the analysis is also motivated by the current worldwide trend towards assessing the impact of FDI on the core sectors of the economy in transition countries. The evidence to date on this issue is mixed. The positive merits of the FDI inflows in the host economy in practice have begun to be questioned.