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

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Foreign Direct Investment, Trade Openness, and Economic Growth

An Empirical Investigation of India

Foreign direct investment has a positive and significant impact on economic growth in the short run, whereas that of trade openness is both in the long and short run. The economic growth of India is caused by FDI, trade openness, and exchange rate, separately as well as together, in the short run. The findings advocate for measures and regulations to manage FDI and prioritise human capital development, financial sector enlargement, and trade expansion as well as improved trade policy reforms to eliminate numerous trade restrictions to ensure sustained long–run economic growth in the country.

The authors would like to thank all the faculty members and colleagues of Lucknow University for their kind assistance, as well as the Cyber Library of Lucknow University colleagues for providing internet access and other facilities. It is important to note that no financial support was received for working on this paper, and it is self–financed by the authors.

Foreign direct investment (FDI) and trade are frequently considered the foremost drivers of economic growth in developing countries. It is the key means of transferring technology from industrialised to poor countries. FDI also encourages domestic investment and helps host countries develop their human resources and institutions. International trade is also recognised as a tool for economic advancement (Frankel and Romer 1999). It allows for more efficient production of goods and services by transferring production to nations where it has a competitive advantage. Although previous researches have shown that FDI and trade have an expedient impact on economic growth, the magnitude of this benefit differs among nations based on human capital, domestic investment, infrastructure, macroeconomic stability, and trade policy. The literature is still debating the role of FDI and trade in economic growth, as well as the value of economic and institutional improvements in promoting them (Makki and Somwaru 2004).

Despite several waves of COVID–19, the FDI in developing Asia increased for the third year in a row to an all–time high of $619 billion, demonstrating the region’s resilience. It is the world’s largest recipient of FDI region–wise, accounting for 40% of total inflows. The rising propensity until 2021 was largely shared throughout the area, with South Asia being the sole exception. However, inflows continue to be heavily concentrated. In that order, six economies accounted for more than 80% of FDI to the region—China, Hong Kong, Singapore, India, the United Arab Emirates, and Indonesia (UNCTAD 2022).

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Updated On : 5th Sep, 2023
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