Impact Of Foreign Direct Investment And Trade On Economic Growth Of India

Emerging Indian Economy

The global economic scenario has experienced considerable dynamics over the years, with new countries and economies into prominence with time. The international economic scenario has become more integrated, inclusive and multi-dimensional, much of which can be attributed to the global phenomena like Globalization as well as country specific phenomena like trade expansion and industrial liberalizations of the major economies (Holland 2018).

In this context, one of the primary emerging economies in the contemporary global scenario, is that of the economy of India. Being one of the primary mixed economies in the global scenario, the country currently ranks sixth globally in terms of nominal GDP and is the third largest economy in terms of purchasing power parity (Ahluwalia and Little 2012). The country has developed considerably over the years and the economic growth of the country received a huge upsurge post 1991, after the economic liberalization (1991) took place in the country. Post Liberalization, the country experienced an impressive growth rate of average GDP (6 to 7%), thereby surpassing the growth rates of many developed countries. India is currently the fastest growing economy in the international scenario, surpassing the economic growth of China (Tomlinson 2013).

There are various exogenous and endogenous factors influencing the economic growth dynamics of India. The liberalisation of the economic sectors of the country, has attracted considerably huge amounts of Foreign Direct Investments in the country as many foreign companies, especially from the developed countries have been attracted to invest in the rapidly expanding business sector of India, to reap the benefits of the huge supply of cheap yet skilled labour as well as to capture the huge and growing markets of the country (Cassen 2016). These FDIs are often considered as one of the major financial sources contributing to the economic development of the country.  On the other hand, liberalization has also facilitated extensive trade and commerce between India and other significant economics of the world. However, there lies debate regarding their roles and positive as well as negative implications on the economic dynamics of the country. Keeping this into consideration, the concerned research proposes to analyse and interpret the impacts and implications (both positive as well as negative) of the inflow of FDI and the trade activities of India on the growth dynamics of the economy of the country. 

The primary research question which the concerned paper aims to focus on is as follows:

Factors Influencing Economic Growth Dynamics of India

How has the economic growth of India been affected over the years, by the dynamics in FDI and the trade sector of the country?

Keeping the primary question into consideration, there are several secondary and specific questions which the research focusses upon, which are as follows:

1. Is greater inflow of foreign direct investment directly or inversely related with the economic growth of the country?
2. Is the expansion of international trade relations directly or inversely related with the economic prosperity of the country?
3. Has the economic growth (if any) due to inflow of FDI and trade expansion percolated in developing all the sectors of the economy of the country?

There have been considerable debates regarding the contributions of the Foreign Direct Investment, which have been increasingly inflowing in India, especially from the developed commercial economies. On one hand while some economists point towards the positive implications of the same as one of the primary stimulus in the industrial and commercial development of the country, thereby contributing to overall economic welfare of the country as a whole, the other group of economists and scholars put forward a more pessimistic view regarding the negative implications of expansion of trade and inflow of FDI in the country. keeping this into consideration, this section of the proposal tries to conduct an extensive review of the existing literatures and empirically supported scholarly articles present in this aspect, in order to analyse the impacts of the concerned attributes on the overall economic growth of the country in consideration. 

Moran (2012) defines the phenomenon of Foreign Direct Investment as the inflow of investment in businesses of a country from an investor or investors of some other country, such that the foreign investors have the control over the local company or businesses in which they invest. The author also points towards the fact that this FDI has been one of the primary components of economic prosperity and development of many countries, especially the developing ones, many of which have been emerging as potentially dominant economies in the global scenario.

The companies which make foreign investments are popularly known as the Multinational Corporations (Alfaro and Johnson 2012). In this context, Jones and Wren (2016), indicates towards the two possible ways in which the foreign MNCs invest in the companies or businesses in some other countries. According to the authors, FDI can be in the form of “Greenfield Investment”, where the MNCs make direct investments by creation of a foreign institution as a whole, or else in the form of direct acquisition of the foreign enterprise as a whole which is known as “Brownfield Investment” (Gatzert and Kosub 2014).

There exists considerable empirically supported literary evidences, which try to show the trend of the inflow of FDI in India over the years. According to the empirically supported literary works of Goel, Kumar and Rao (2012), the inflow of the FDI in India has specifically increased visibly post the implementation of the liberalization policy in the economy of the country in 1991, which resulted in the removal of many of the restrictive and regulated trade practices.  

FDI and Trade in India: An Overview

As is evident from the above figure, the FDI inflow in the country started post 1991, with the extents increasing with time. However, there has been a considerable upsurge in the inflow of the same in the country post 2000, much of which can be attributed to the growth of the industrial and service sectors in the country.

Sahni (2012) finds a direct linkage of the inflow of FDI with the phenomenon of trade openness in India. The Trade Openness index, showing the total trade volume (Imports + Exports) as a percentage of GDP of the country, increases when the country starts involving in more trade and commercial activities (especially international). 

There exists different opinions and literary evidences regarding the factors which determine FDI inflow in India. In this context, Baby and Sharma (2017), in their paper, with the help of statistical analysis points towards the importance of the factors primarily like that of the GDP of the country, the trade openness, the size of the different markets in which the investment inflows as well as the magnitude of inflation, interest rates and wage levels in the country, in determining the FDI flow of the country (Mathur and Singh 2013).

There lies substantial debate regarding whether FDI inflow in India has been beneficial for the country or whether the same has brought negative implications on the economy of the same. Malhotra (2014), in his empirically evidenced and supported work points towards the contribution of the inflow of FDI in India over the years, in terms of creation of industrial prospects, which in turn has resulted in the creation of jobs in these newly prospering industries in the country. The author also asserts towards the fact that the increase in the job opportunities, owing to this inflow of FDI has led to an overall improvement in the quality of life of the people in the country.

Supporting this view, Mahalakshmi, Thiyagarajan and Naresh (2015), augments the same by suggesting that the inflow of FDI and a related increase in the trade activities of the country has also led to the inflow technological and infrastructural innovations in the country, which in turn has led to the creation of more capital efficiency and accountability of the nation. This in turn has also led to a trickle-down effect and a multi-lateral implication, which can be seen from the overall improvement in the quality of life, educational prospects as well as prevalence of healthy competition in the country. Ray (2012), points towards the positive implications of the same in the aspects of higher consumer saving, higher wages, increase in the revenue of the government and similar attributes.

Literature Review on Impacts of FDI and Trade on Indian Economy

However, on the other hand, Bose (2012), highlights the problems which have been created by these inflow of FDI and expansion of trade prospects of the country. According to the author, the negative impacts of the same can be seen in the destruction of the domestic industries and small entrepreneurs, in the shrinking of the subsistence sector as well as indigenous job creations and political instability and creation of lobby, which have been prominent in the contemporary economic domains of the country. 

There remain considerable literatures which highlights the pros and cons of FDI inflow and trade on the economy of the country. However, the exact process in which these factors benefit or hamper the country and the differences in the sectoral distribution of such effects have not been highlighted considerably by the existing works. Keeping this into consideration, the concerned research proposes to highlight and interpret these issues in order to address the gaps present in the current literary evidences.

The research philosophy or philosophical approach highlights the philosophical construct in which the researcher aims to construct and conduct the entire research. There exist three broad types of research philosophies, namely positivism, realism and interpretivism: 

While positivism deals with the study of the concerned issues in the lights of scientific evidences and in a statistical framework (mainly for quantitative data), Realism focusses both on quantitative and qualitative researches, specifically adhering to the models which are best fit for the concerned subject matter. Interpretivism, however, deals with detailed and in-depth analysis of small and qualitative data.

The concerned research, aiming to study the impact of FDI and trade on the economic growth of India, takes a quantitative approach involving statistical methods for analysis of the collected data and thus, adheres to Positivism as its chosen philosophical approach.  

Research logic can be of primarily three types- deductive, abductive and inductive. The abductive approach starts with observations and seeks to find the most logical explanation and inference of such observations. On the other hand, deductive logic in research leads to formation of a theory or hypothesis first and then testing the viability of the same in the light of the observations gathered. The inducive approach, however, studies the data and evidences present in the concerned aspects and then constructs new theories and assertions based on such observations (Ormston et al. 2014).

Keeping into account the nature of operation of these three, logical frameworks in research, the inductive approach seems to be most suitable for the concerned research as the research aims to build new assertions regarding the positive and negative impacts of the FDI inflows on the economy of India.

Research Methodology

There are two main methods in which researches are usually conducted- the methods being qualitative and quantitative. The quantitative methods are used in case of analysing numerical evidences and their patterns, in order to interpret the attitudes, behaviours and implications of the numerically observable variables. However, not all the aspects of a research can be measured cardinally and there remains several abstract and ordinal aspects too, for the purpose of analysis of which, qualitative research methods are used.

The concerned research aims to analyse the impacts of the inflow of FDI on the economic dynamics of the country, for the purpose of which large quantitative data needs to be analysed and statistically interpreted to observed the relation and trends between the concerned variables. For this purpose, the research proposes to take quantitative analytical method. 

For the purpose of analysis of any aspect, there are usually two types of data collection methods- primary and secondary.

Usage of primary data, in the form of first hand data collected through interviews with the relevant respondents facilitates in enhancing the quality and trustworthiness of the data as there remains less chances of biasness and faults in the same (McNabb 2015). However, collection of such data is a time consuming and costly process, especially for such researches which need large and widespread data for the purpose of analysis, which in turn is facilitated by secondary data collection. These methods involve analysing and interpreting previously collected data from different sources (Punch 2013).

Keeping this into consideration and owing to the nature of the concerned research, secondary data collection and analysis is proposed to be undertaken for the proposed research. Data are proposed to be collected from authentic and reliable government resources, non-government reputed statistical data sites and other reputed journals and websites. While collection of secondary sources, the research proposes to check the viability and authenticity of the relevant data, by tallying the same with multiple data sources (Nardi 2018).

Given the fact that the research aims to study and explore the impacts of the FDI and trade dynamics on the overall economic prosperity of the country and for the purpose focusses on secondary and quantitative data, the research proposes the usage of statistical tools and frameworks for the purpose of analysing the causal effect relationships between the concerned independent variables taken into consideration like that of the FDI inflows, trade volumes as well as the dependent variables like that of the economic growth indicators like GDP growth, employment statistics, standard of living, cost of living, inflation as well as sectoral distribution of economic welfare (Silverman 2018). The research proposes to use statistical software platforms like Excel, SPSS for the purpose of analysing and interpreting the data and their correlations in order to explore the actual impacts of FDI and trade on economic growth of India (Treiman 2014).

Conclusion

The primary limitation which the concerned research is expected to face is that of the usage of secondary data for the purpose of analysis and interpretation of the issues concerned, which have the possibility to be biased and erroneous. Another limitation in this aspect is that the research studies the impacts of FDI and trade dynamics on the economic growth of India, by taking several economic growth indicators of the country (Connelly 2013). However, there may be other factors influencing these economic indicators and their dynamics and also there may be many other variables influenced by the inflow of FDI and trade expansion, which is not possible for the research to observe and incorporate in its framework, thereby limiting the outcomes and their implications to a considerable extent.

For any research to be efficient, inclusive as well as productive, it is of utmost importance for the researcher to abide by the ethical norms and regulations present in the research domain. Keeping this into consideration and with the objective of carrying out the proposed research in an ethical framework, the researcher proposes to follow the ethical framework which has been exiting and also proposes to maintain authenticity and unbiasedness in the process of collection and interpretation of data (Mulvey 2015). The research also proposes to proceed with the research activities only after receiving permission from the ethical board of the esteemed institution. 

References

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Alfaro, L. and Johnson, M.S., 2012. Foreign direct investment and growth. In The evidence and impact of financial globalization (pp. 299-309).

Baby, S. and Sharma, A.M., 2017. Determinants of Foreign Direct Investment Inflows in India.

Bose, T.K., 2012. Advantages and Disadvantages of FDI in China and India. International Business Research, 5(5), p.164.

Cassen, R., 2016. India: population, economy, society. Springer.

Connelly, L.M., 2013. Limitation section. Medsurg Nursing, 22(5), p.325.

Gatzert, N. and Kosub, T., 2014. Insurers’ investment in infrastructure: Overview and treatment under Solvency II. The Geneva Papers on Risk and Insurance-Issues and Practice, 39(2), pp.351-372.

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Malhotra, B., 2014. Foreign Direct Investment: Impact on Indian Economy. Global Journal of Business Management and Information Technology, 4(1), pp.17-23.

Mathur, A. and Singh, K., 2013. Foreign direct investment, corruption and democracy. Applied Economics, 45(8), pp.991-1002.

McNabb, D.E., 2015. Research methods for political science: Quantitative and qualitative methods. Routledge.

Moran, T., 2012. Foreign direct investment. The Wiley-Blackwell Encyclopedia of Globalization.

Mulvey, G.J., 2015. Ethics in research. Bulletin of the American Meteorological Society, 96(3), pp.477-479.

Nardi, P.M., 2018. Doing survey research: A guide to quantitative methods. Routledge.

Ormston, R., Spencer, L., Barnard, M. and Snape, D., 2014. The foundations of qualitative research. Qualitative research practice: A guide for social science students and researchers, pp.1-26.

Punch, K.F., 2013. Introduction to social research: Quantitative and qualitative approaches. sage.

Ray, S., 2012. Impact of foreign direct investment on economic growth in India: A co integration analysis. Advances in Information Technology and Management, 2(1), pp.187-201.

Sahni, P., 2012. Trends and determinants of foreign direct investment in India: An empirical investigation. International Journal of Marketing and Technology, 2(8), p.144.

Silverman, B.W., 2018. Density estimation for statistics and data analysis. Routledge.

Theindiaeconomyreview.org. (2018). FDI & Its Determinants in India. [online] Available at: https://www.theindiaeconomyreview.org/Article.aspx?aid=106&mid=5 [Accessed 20 Apr. 2018].

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Treiman, D.J., 2014. Quantitative data analysis: Doing social research to test ideas. John Wiley & Sons.

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