Effect of Foreign Direct Investment (FDI) on the Economic Development of India

Abstract

In the recent times, there is a growing importance for Foreign Direct Investment (FDI). FDI is playing a vital role in filling investment gaps in various key sectors of the developing countries. Policy makers of many emerging countries have recognized the need for change in their policy frameworks to give a boost to foreign investment. In the present study, influence of FDI on economic development of India has been studied by employing simple OLS Regression and Autoregressive Integrated Moving Average (ARIMA) method. The study covers a period from 1st June, 1997 to 31st March, 2011. Index of Industrial production is used as a proxy of economic development. Monthly data of Foreign Direct Investment (FDI) and Index of Industrial Production (IIP) were collected from various issues of Reserve Bank's Hand Book of Statistics. Pearson's Correlation Coefficient results show strong association between FDI and IIP. Results of Ordinary Least-Squares Regression points out the significant influence of foreign investment on economic development of the country. Results of ARIMA also confirm that FDI has a significant impact on the economic development of the country.