ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Does FDI Promote Growth?

Evidence from Indian Manufacturing Sector

The spillover effects of foreign direct investment in the Indian manufacturing sector are examined by analysing the financial performance of foreign firms with domestic business group firms and stand-alone firms for selected sub-periods during 2001–15. The study shows that the sales efficiency of foreign firms is not significantly different from that of the domestic firms in all the sub-periods studied, except during 2008–09. The operational efficiency of foreign firms is better than that of the domestic firms till 2009 and, for the later period, there is no significant difference in operational efficiency of domestic and foreign firms.

Capital movements across countries in the form of foreign direct investment (FDI) have been one of the prime features of global economic integration. Home countries, mostly developed economies, promote FDI to get higher returns for their capital. Host countries, mostly developing economies, welcome FDI as part of their outward-oriented development strategy. FDI, mostly contributed by multinational companies (MNCs), is expected to promote economic growth in host countries. The development experience of the newly industrialised economies in Asia is a prime motivating factor for the developing economies to follow outward-oriented economic policies. Developing countries, especially the Asian countries, are competing with each other to get a lions share of the FDI flows from developed countries. However, in recent years, outward FDI from emerging economies like China also accounts for a substantial part of global capital flows.

As per the United Nations Conference on Trade and Developments (UNCTAD) UNCTADstat database, in 2015, the United States (US) received 21% of the worlds inward FDI, followed by China and Hong Kong receiving about 17%. For the pre-crisis year 2007, China and Hong Kong received 7% of worlds inward FDI, and the figures for the US, British Virgin Islands, Russia, and Brazil are 11%, 1.5%, 2.8%, and 1.7%, respectively. India accounted for 2.5% of the inward FDI in 2015 as against 1.26% in 2007. China and Hong Kong have not only emerged as one of the largest recipients of FDI, but they also account for approximately 13% of the worlds outward FDI in 2015 as against the USs share of 24%. In the pre-crisis year of 2007, China and Hong Kong contributed 4% of the worlds outward FDI and the US accounted for 17%. Appendix Table 1 (p 62) provides shares of the BRICS (Brazil, Russia, India, China and South Africa) countries and the US in world inward and outward FDIs. While the US is the leading nation in both outward and inward FDIs, we find that China has also emerged as a major contributor in outward FDI and receiver of inward FDI.

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Published On : 7th Sep, 2018

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