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Determinants of Foreign Direct Investment in India

Countries of the world, particularly developing economies, are vying with each other to attract foreign capital, particularly foreign direct investment (FDI) to boost their domestic rates of investment as also to acquire new technology and managerial skills. As with many developing nations, encouragement of FDI is an integral part of the on-going economic reforms in India. To formulate a foreign investment policy that is most conducive to attracting FDI, it is imperative to first study the determinants of FDI in a country for the policymakers to ensure that various measures intended to induce FDI are necessary and would lead to incremental investment. This paper identifies the determinants of FDI in India, employing the ordinary least squares regression analysis on quarterly data for the period 1991 to 2003. It examines the impact of GDP, taxes, trade openness, labour cost, and political stability on FDI inflows. Using alternative specifications (based on differences in dependent and independent variables used), FDI inflows into India are found to be significantly determined by expected national income, tax rate, trade openness and labour cost for the period under study.