Today, Foreign Direct Investments (FDI) into a large developing economy like India arises from many source countries. The question of country characteristics that drive inward FDI into India is an interesting one. This study carries out an analysis of the inward FDI flows to India from a number of countries spanning a period of ten years, that is, from 2001-02 to 2010-11. This period is interesting because it is marked by the rapid rise of FDI into India, following the economic revival from slow growth of the period 1997-98 to 2002-03. These inward FDI flows have been explained by an extended gravity model-FDI flows between two countries depend on the size of the two countries and inversely the distance between the two- and an extended allometric model by incorporating other variables such as common language, tax status, interest differential, and distance to arrive at the importance of these variables. Additionally, in representing the “size” in the both models by not GDP but as a constitution of per capita income and population, the difference between countries with the same GDP but at different levels of development are accounted for in the normalization itself so that the influence of the economic variables is more robustly estimated. The allometric model is found to be superior in explaining the overall variance in FDI inflows.
Determinants Of The Sources Of FDI Into India
Author : Prathyush Sarasa, Disha Singh, Sebastian Morris