How Do Foreign Direct Investment and Growth Interact in India?

The study investigates the relationships between the FDI and economic growth, namely, gross domestic product, export and foreign exchange reserve over the period 1994 to 2013. Johansen's co-integration and vector error correction model have been applied to explore the long-run equilibrium relationship between foreign direct investment and economic growth. The analysis reveals that economic growth and the foreign direct investment are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the foreign direct investment is positively relate to gross domestic product and foreign exchange reserve but negatively relate to export. The export is found to be insignificant in determining FDI. In the Granger causality sense, foreign direct investment causes GDP. FDI causes GDP in both long run and short-run. While there is no bidirectional causality exists between any variables under study. Furthermore, it is observed form the findings of VECM and Granger Causality test that FDI creates a long run relationship with economic growth but in short run no causality found between FDI, export and foreign exchange reserves