FDI, Economic Growth And Externalities

Font Size

Print

Feedback

Email

Discuss

Related Articles

Eyeing FDI, US to woo India IncGovt may hike FDI in DTH TV to 74 pct: OfficialIFC, Goldman FDI proposals approvedFDI inflow triples in FY'08: NCAER

: The policy discourse on FDI in developing countries like India views it largely as an additionality to domestic inv-estments to bring about a targeted rate of GDP growth. Thus during the 10th Plan (2002-07), FDI inflows of $8 billion a year are considered necessary to att-ain the 8% growth target. This discourse rarely strays into exa-mining the externalities of FDI on the Indian economy.The ass-umption is of positive externalities. FDI usually flows in as a bundle of resources like capital, technology, managerial/organisational skills and marketing knowhow which spill over to domestic enterprises in the host economy; hence, FDI contributes to growth more than proportionately when compared to domestic investments.

However, this may not happen at all because of poor linkages with domestic enterprises or poor absorptive capacity. FDI through MNCs may adversely impact on domestic enterprises given their superior technology, brand equity and aggressive ma-rketing techniques. Hence, FDI may crowd out domestic investments and have immiserising effects on the host economy.

A number of studies have examined the effect of FDI on growth across various countries in a comparative static framework, but their findings are of a mixed nature. Nagesh Kumar and Jaya Prakash Pradhan’s wo-rk*, however, is different as it loo-ks at the dynamic nature of the effects of FDI for 107 developing countries between 1980-99.

While their panel data estimations suggest the positive eff-ects of FDI on growth, there are also a number of countries who-se experience suggests that gro-wth also influences FDI. In a few, there is a two-way causation, but in more than half the number of countries it was difficult to infer whether FDI influenced growth or vice versa. Moreover, only half the number of countries showed a significant coefficient of FDI, indicating that it impacted on domestic investments. The bro-ad pattern was that FDI initially had a negative effect on domestic investments but subsequent-ly had a more positive one, with the net effect depending on the nature and quality of FDI. Of the countries which showed a significant coefficient of FDI, 29 experienced a net crowding out effect, while 23 experienced a net crowding in effect. India bel-ongs to the former.