Title: Determinants of Foreign Direct Investment: A Macro Perspective
Abstract: FDI: The Concept 'Capital and investments along with human resources are the essential hub of development'. This statement has gained lot of importance in recent times. FDI has been instrumental in economic growth of developed countries. Almost every developed country has had the assistance of foreign finance to supplement its own meagre savings during the early stages of its development. This has prompted India and other developing countries to reform their economic policies to attract FDI. India, like many other countries, attracts foreign direct investment as an important element in their strategy because FDI is widely regarded as an amalgamation of capital, technology, marketing and management. In the liberalization era, India is known to have attracted a huge quantum of FDI. According to UNCTAD (2007) India has emerged as the second most attractive destination for FDI after China and ahead of the US, Russia and Brazil. India has experienced a marked rise in FDI flows in the last few years, FDI inflows in to India has increased from $11.4 billion in 1990-99 to $371.82 billion in 2009-10. FDI is the process whereby resident of one country (the home country) acquires ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country). Balance of Payment Manual of IMF defined the FDI as a category of international investment that reflects the objective of obtaining a 'lasting interest' by a resident entity in one economy in an enterprise resident entity in another economy. The 'lasting interest' implies the existence of a long relationship between the direct investor and the enterprise, and a significant degree of influence by the investor on the management of the enterprise. RBI definition of FDI is more stringent since it excludes reinvested earnings, foreign equity listings, foreign subordinated loans to domestic subsidiaries, overseas commercial borrowings, financial listing, trade credits, grants, bonds, ADRs and GDRs whereas the IMF Guidelines include all these under FDI. Thus there are differences in computation. Focus & Framework The focus of this study is to analyze the behaviour of some selected micro and macro pull and push factors of FDI determinants. The objective is to observe and analyse the dynamics of some selected FDI determinants in relation to the inflows and outflows as a consequence of economic reforms in India. Different frameworks have evolved for analyzing the determinants of FDI. An exceptionally flexible and increasingly popular one is the eclectic theory of John Dunning according to which the determinants of FDI could be considered on the basis of firm specific advantages, internalization advantages and countries' specific advantages. These advantages may be termed as 'push factors' of the host countries. Literature Survey Markusen and Maskus (1999), Love and Lage-Hidalgo (2000), Lipsey (2000), and Moosa (2000), highlight how the domestic market size and differences in factor costs can relate to locational FDI. From the point of view of foreign investors this factor is important where the industries are characterized by relatively large economies of scale. Labour cost which is one of the major components of the cost function deters FDI. It is true for the firms, which engage in labour intensive production activities. Studies by Kravis and Lipsey (1982) Wheeler and Mody (1990) Lucas (1993) Wang and Swain (1995) and Barrell and Pain (1996) found no significant negative relationship of wage and FDI. Nonetheless there are other re searchers such as Morre (1993), Love and Lage Hidalgo (2000) who have found out that higher wages do not always deter FDI in all industries and have shown a positive relationship between labour cost and FDI. Gostanga (1998) and Asiedu (2002) focus on policy reforms in developing countries as determinants of foreign direct investment inflows. …
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
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Cited By Count: 18
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