FOREIGN DIRECT INVESTMENT AND GROWTH OF INDIA: DOES FINANCIAL SECTOR DEVELOPMENT HELP IN IMPROVING ABSORPTIVE CAPACITY?
Abstract
This paper investigates whether there exists a long term relationship between foreign direct investment (FDI) and economic growth in India with special reference to the role of financial sector development (FSD), which is now considered as a critical contingent factor as borne out by recent empirical studies elsewhere. A 35 -year period (1979-2013), which is covered by this paper, witnessed gradual introduction of economic reforms picking up speed from early 1990s. The doors were opened to FDI. Undertaking an empirical study on FDI’s contribution to growth of Indian economy by taking into account the role of financial sector development (FSD) as a contingent factor, this paper concludes that FDI and FSD have contributed to growth. It is also confirmed that the interaction term between FDI and financial development indicates a complementary relationship between the two.
Keywords: India; FDI; FSD; Growth; Threshold Level; Interaction Effect.
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