Objectives: The present research work is an attempt to assess the factors determining the inflow of foreign direct investment in India by evolving an empirical framework using time series data.
Methods/Statistical Analysis: Owing to time series data, stationary of economic variables was checked by using Unit Root Test. Thereafter, for assessing the unidirectional and bidirectional relationship among variables a Pairwise Granger Causality Test was performed. Further, Ramsey’s reset Test and White’s Heteroscedasticity Test have been used. After investigating the Tolerance and Variance Inflating Factor, a multiple ordinary least squares regression model was developed which enabled to partially explain the inflows of FDI in Indian Economy.
Findings: The estimated model encompasses five explanatory economic variables. These variables are the market size (population), the size of the tourism industry (tourist arrivals), infrastructure development (rail and road density), economic growth (percentage change in GDP) and openness (export plus import as a percentage of gross domestic products) of markets. Hence, the paper tries to examine the impact of above said factors on Indian economy in general and their impact on Foreign Direct Investment in particular. Apparently, some of the variables such as tourism, infrastructure, and openness of markets have exhibited a favorable impact on foreign direct investment. On the other hand, market sizes impact on FDI has been found insignificant. Therefore, in order to attract the Foreign Direct Investment in India, a sound infrastructure, liberal economic policy, favorable tourism policy and GDP growth seem to be desirable determinants whereas population size may not be obliging in this regard.
Application/Improvements: The results of the study suggest that to increase the inflows of FDI in Indian Economy, the policy should be focused on infrastructure development and increasing economic growth. Further, the policy of trade liberalization is also beneficial for Indian Economy.