Crisis Exacerbated Fiscal Deficits And Possible Impact On Fdi Flows: An Empirical Analysis Of Emerging Europe And India

Several developing economies impacted by the recent global financial crisis, are experiencing large increases in fiscal deficits and are also concurrently facing a loss of long term stable capital inflows like FDI. In this paper we try to determine the FDI encouraging or debilitating effect of government balances relative to other determinants of inward FDI. In a dynamic panel regression with data from 14 European countries and India, fiscal health by itself is found to be a very significant determinant of FDI inflows vis-à-vis certain other economic and developmental policy indicators, underlining the significance of pruning government deficits for sustainable FDI in the post-crisis scenario. We find growth, market size and past FDI inflows and the policy variables related to business and trade environment, to be the other key determinants of inward FDI flows.