TAILIEUCHUNG - Economic Reforms, Foreign Direct Investment and its Economic Effects in India

With data provided by the tool, users can create a matrix to show industry employment location quotients above for each county in the region and for the region as a whole. (A location quotient over means that a region has a higher concentration of employment in a particular industry than the national average. Using a location quotient of or more provides a conservative estimation for this example.) This matrix enables users to see the overall competitive strengths of the region, as well as those of individual counties. Understanding a region’s industrial strengths provides valuable insights into how. | The Kiel Institute for the World Economy Duesternbrooker Weg 120 24105 Kiel Germany Kiel Working Paper No. 1272 Economic Reforms Foreign Direct Investment and its Economic Effects in India by Chandana Chakraborty Peter Nunnenkamp March 2006 The responsibility for the contents of the working papers rests with the author not the Institute. Since working papers are ofpreliminary nature it may be useful to contact the author of a particular working paper about results or caveats before referring to or quoting a paper. Any comments on working papers should be sent directly to the author. Economic Reforms Foreign Direct Investment and its Economic Effects in India Abstract Foreign direct investment FDI has boomed in post-reform India. Moreover the composition and type of FDI has changed considerably since India has opened up to world markets. This has fuelled high expectations that FDI may serve as a catalyst to higher economic growth. We assess the growth implications of FDI in India by subjecting industry-specific FDI and output data to Granger causality tests within a panel cointegration framework. It turns out that the growth effects of FDI vary widely across sectors. FDI stocks and output are mutually reinforcing in the manufacturing sector. In sharp contrast any causal relationship is absent in the primary sector. Most strikingly we find only transitory effects of FDI on output in the services sector which attracted the bulk of FDI in the post-reform era. These differences in the FDI-growth relationship suggest that FDI is unlikely to work wonders in India if only remaining regulations were relaxed and still more industries opened up to FDI. Keywords foreign direct investment economic reform growth effects India cointegration causality JEL classification F21 F23 O53 Corresponding authors Chandana Chakraborty School of Business Montclair State University Upper Montclair NJ U. S. A. Phone 01-973-655-4125 Fax 01-973-655-4456 E-mail chakrabortyc@ .

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