Impact of FDI on Indian External Sector

Abstract

An empirical assessment of the Impact of foreign direct investment (FDI) in a host country’s external sectors performance is important, since external sector have been for a long time viewed as an engine of economic growth. FDI promotes export and import by facilitating India access to new and larger markets. The present study examines and analyzes the impact of FDI on the Indian external sector between 1970-71 and 2008-09. Ordinary least square (OLS) regressions and the empirical analysis are conducted by using annual data on FDI inflow, Total Export, Total Import and Foreign Exchange Reserve in India over the 1970-71 to 2008-09 periods. There is sufficient evidence to show that there are significant relationship between Indian External sector and foreign direct investment inflows (FDI) in India. FDI has direct positive impact on Export, Import and Foreign Exchange Reserve, which FDI rate increase by 1% will lead to increase by 4.1% in total export with no autocorrelation, while 45% in total import and 61% in foreign exchange reserve with presence of autcorrelation. It is also observed that the impact of FDI on opportunities for domestic business and economic activities is positive and net attitudes of foreign firms toward FDI. Key Words: FDI inflows; Export; Import, Foreign Exchange Reserve, Regression Analysis

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