Understanding the Impact of Inward FDI and Economic Growth

With liberalization of trade and markets nations across globe are able to overcome capital scarcity with inflow of Foreign Direct Investment (FDI). FDI is an important factor in the globalization process as it provides opportunities and financial challenges around the world promotes stable and lasting economic links between countries through direct access to investors in home economies to production units of the host economies. Understanding the influence/impact of inward FDI on economic growth is a dynamic area to study for researchers, as the empirical evidence on impact of FDI inflow on and economic growth are mixed, which deserves fresh enquiry. Objective of this paper is to identify the long term equilibrium relationship among inward FDI and gross domestic product, which will help one to understand the impact of inward FDI on economic growth. Gross Domestic Product (GDP) is proxied for economic growth. This is an empirical research and the research design is longitudinal in nature. Results of this study indicate that there exist a long run cointegrating relationship between inward FDI and GDP, the two variables for the study period from 1970-2010. 1% change in GDP will raise FDI inflow by 4.37%. The adjustment coefficient of the Error Correction Term (ECT) is negative and statistically significant indicating positive adjustment effect, which ensures, that in case of any external shocks, the long term equilibrium can be reverted back, and will re-ensures equilibrium between FDI inflow and GDP.