An Empirical Analysis of Foreign Direct Investment and Economic Growth in India

Abstract: This study investigates the link between foreign direct investment and Indian economic growth as measured by GDP from 1991 until 2020. A Vector Autoregressive model was used to explore this relationship, which assessed the lag structure, validated the stationary of both series, and investigated co-integration and causality between economic growth and foreign direct investment. Our findings showed that a bivariate VAR (1) was the correct model to use and that GDP and FDI are stable at initial differences but not at levels. As a result, the two series merge to be of order one. Co-integration tests reveal that the two variables are co-integrated, indicating that the two series are in long-run equilibrium. The Vector Error Correction indicates that changes in GDP do not cause changes in foreign direct investment, but instead, changes in foreign direct investment cause changes in GDP. According to Granger tests, the GDP and FDI of the Indian economy are independent (no causation between them). Keywords: Economic Growth, Foreign Direct Investment, Co-integration, Vector Error Correction, Granger Causalit