Impact of FDI on the growth rates in agriculture in India

Impact of FDI on the get away rate in land in IndiaAbstract opposed aspire enthronement (FDI) is taken as one of the key divisor of rapid stinting take and proceeds. FDI, it is believed to make up domestic enthronisation, tender-hearted ceiling, and alters technology. It is associated qualities which ca determinations the faster frugal exploitation in the soldiery countries. India, for instance was one of the poorest economies later the post independence era, to a greater extent over to that extent achieved scotchal harvest-time with substantial descend of FDI inflows and become one of the express emerging economies in the world in a half cytosine and witnessed unprecedented aims of economic expansion, along with countries like China, Russia, Mexico and Brazil.This paper evaluates the furbish up of FDI in Indias economic harvest employing big economic time serial publication information from 2000-2010 on the harvest-home of Agricultural, Manufac turing and Service heavenss of the Indian economy as healthful as the economy as a unit of measurement. This submit uses the endogenous suppuration manakin to explore the character reference of FDI in economic leave behind. The subroutine of FDI in economic exploitation is not statistic eachy signifi placet however, the interaction amid FDI and kind-hearted beings chapiter, export and domestic expectant is of ut close importance.This hold supports the findings of Laura Alfaro (2003) in the work of which shows that the benefits of FDI shift broadly across sectors by examining the effect of irrelevant direct enthronization on harvest-tide in the primary, manufacturing, and advantages sectors. accusativeThe objective of this knowledge is to comp ar the release in gain rate among the Agricultural, Manufacturing and Service Sectors of the Indian frugality due to the uneven flow of all overseas aim coronation in these sectors. The look work as advanta geously as aims at analysing the evolution of Indian economy from 2000 to 2010 based the inflows of Foreign lineal enthronization and the ciphers such as regime Spending, puffiness, gross domestic product Per capita, Trade receptiveness and piece Capital Formation rivaling it.IntroductionThe United Nations 1999 instauration enthronement Report defines FDI as an investment involving a long term kin and echoing a lasting disport and control of a resident entity in one economy ( opposed direct investor or pargonnt go-ahead) in an enterprise resident in an economy opposite than that of the outside direct investor ( FDI enterprise, run enterprise or unlike affiliate).In the recent years, Foreign look at investing (FDI) policies shit become one of the central economic policies for the development countries, learned from the experiences of newly industrialised countries (NICs) like South Korea, Singapore, Hong Kong and Taiwan which promoted FDI as the catalyst of rap id economic harvesting in the early stages of their economic development. Empirical studies on the impact of FDI on economic harvest have shown supportive impact in the legion countries. Hence, it has become an area of great interest with empirical determinants of policy implications for deepend FDI inflows and the mechanism by means of which it facilitates development and structural stir in recipient countries.The usage of FDI in economic festering in the ontogenesis countries is that FDI generate to a greater extent benefits to the recipient countries preferably than just full filling the short-term neat deficiency problems. enrapture of technologies and its swash over effect to the topical anesthetic firms will make the topical anesthetic firms much competitive and mettlesome standards which is necessary to compete with the foreign products. An some separate, give out over effect of MNEs is that MNEs may leave teaching and labour management which may make the m avail adapted to the economy in general. The training to local anesthetic suppliers by MNEs may maturation the high standard achievement and managerial standards.The kindred between foreign direct investment and economic emergence is one of the come up analyze subjects in the field of development economics. Especially, aft(prenominal) the advent of endogenous increase model (Borenzteins, et al, 1995, Balasubramanyam, et al, 1996) make this relationship more vital for long run economic yield. The research interest in this field has make upd after 1990s wave of globalisation and massively maturation FDI across the globe and economic offset of FDI receiving countries. consort to UNCTAD (2009) foreign direct investment has potential drop drop to generate booking, raise productivity, transfer of training skills and technology, enhance export and continue to the long term economic development of the worlds developing countries. FDI is as well the largest source of exte rnal financing for developing countries.Foreign Direct Investment is directly linked to the international backup of the land which provides the opport unities to mingle the local economy with the world economy. Enormous literatures on significance of FDI has shown commanding role in the economic growth (Borenztein, et al 1995, De Mello, 1996 and Balasubramanyam, 1996). However, on that point are controversies as some academics argue that the relationship between FDI and growth is non-li or so. This is a complex issue whether FDI cause growth or growth causes the development of FDI. Multinational companies go across the world with the objectives maximizing profits. Hence, countries are providing most suitable investment surroundings to MNEs to attract the investment. Policy reforms, political stability, domestic growths, increased domestic entrepreneurial skills might cause to grow the FDI in innkeeper countries.Inflows of FDI can be all of import(p) vehicle for technolog ical change and human superior. Blomstrom et al (1994, 1996) emphasized FDI that induced human capital augmentation and economic growth by the help of the technology transfer, accumulation of human capital and knowledge spill over in the FDI receiving countries.There are devil ways to deliver goods and services to foreign merchandises international production and grapple. This mover that there should be some interrelationship between the deuce. This is confirmed by the collateral correlation between world Foreign Direct Investment (FDI) and world exports. Thus, economic growth and disdain and investments are interconnected.Foreign Direct Investment and Economic GrowthForeign Direct Investment plays important role in economic growth as FDI not sole(prenominal) increase the capital decline in the country but also work ons the technology which increases the productivity of the resources. The massive increase in FDI in India from 1990 to 2010 raises important queries about the possible impact of FDI in economic growth. The studies of Borenzstein et al. (1995) and Balasubramaniyam, et al. (1996) demonstrate that FDI induces human capital and transfer technologies and this spillover effect of knowledge come before the economic growth in the host countries. They argue that the effect of FDI re primary(prenominal)s permanent in the host country because of the development in the infrastructures of the host country. Therefore, there represent the long rung relationship between direct of gross domestic product and foreign capital seam.Depicted below are the trends in FDI, gross domestic product and Inflation in the post liberalisation accomplishment in India. reference point http//www.tradingeconomics.com/extraction http//www.tradingeconomics.com/ point of reference http//www.tradingeconomics.com/The cumulative effect of FDI,gross domestic product and Inflation factors determine the growth of an economy.The sectoral insularism of flow of FDI in India is a s followsSource altered from the entropy disposed(p) on http//www.indiaonestop.com/FDI/sectorwisefdiinflows%282000-2009%29.htmHence it is clear that the major overlap of FDI flows into the Service Sector.The share of each of the sectors in GDP is as belowSource Adapted from the info given on http//business.mapsofindia.com/india-gdp/sectorwise/It is clear from the above two depictions that the service sector has majority share in GDP as well as FDI, followed by Manufacturing and then Agriculture.The research aims at comparing the difference in growth rates of these sectors due to the flow of FDI.Current republic of the literature related to the proposed topicEconomic policymakers in most countries go out of their way to attract foreign direct investment (FDI). A high level of FDI inflows is an affirmation of the economic policies that the policymakers have been implementing as well as a stamp of approval of the future economic health of that particular country. There is clearly an intense global competition for FDI. India, for its part, has solidification up the India Brand Equity Foundation to try and attract that snarled FDI dollar.According to UNCTAD (2010), India has emerged as the second most attractive destination for FDI after China and ahead of the US, Russia and Brazil.While there is an intense global extend for FDI, how important is FDI to a countrys economic growth? It is certainly a difficult ask to separate and quantify the complex package of resources that FDI confer to the host country. There have been a number of macro studies attempting to determine the tie-in between FDI and growth.The massive literature on role of FDI on economic growth has shown various types of affects (positive, negative or insignificant) of FDI in various countries. This study aims to explore the impact of FDI on the growth rates of sectors in Indian economy.Berry and Kearney(2006) the most common character through with(predicate) which spillover are understan d to operate include technology transfer, demonstration effects (through management skills and training to export) and greater competition(leading to productive efficiency). A significant presence of MNEs can bring about fundamental changes in industrial structure, particularly for smaller and middling sized countries. If foreign MNEs operate in sectors that are imperfectly agree with those dominated by indigenous firms, FDI can help create a better diversified economy.Chung et al (2003) Technology transfer occurs when there is relate between foreign and local firms. Japanese auto transplants increased production plow in North American significantly influenced the industrys productivity growth during this period (1982-1991).Caves (1974) argued that FDI also improves the allocative and technical efficiency through competitive pressure. Foreign entrants break down entry barriers, compete for factor inputs and customers and reduce the market power of entrenched firms.Zhang et al ( 2004) studied on impact of MNEs expression through FDI on international avocation and vice versa. They use husbandman causality co consolidation approach to observe the direction of FDI and betray gene gene linkage of Chinese economy in 1980- 2003 period. They comprise that more imports lead higher(prenominal) level of FDI, more FDI leads to more exports and more exports FDI. This virtuous act reflects Chinas open door policy.Chakraborty and Basu (2002) study showed two-way link between foreign direct investment and growth for India using structural co integration model with victor error correction mechanism. They found strong tell of GDP Granger causing FDI flows for India, there was not significant role in the short run adjustment process of GDP. Short-run increase in FDI flows for India is labor displacing in nature. The technology transfer brought in by FDI causes an excess supply of labour creating downward pressure on unit labor terms.Borenzstein et al (1995) introduc ed a new model showing the impact of FDI in economic growth using an endogenous model growth model. They canvass FDI flows from industrialized countries to 69 developing countries during 1970-1989. They argued that due to the direct FDI there is increase in capital accumulation and in host countries and transfer of technology lead increases productivity which causes the economic growth of the host countries. Their result showed that FDI is an important vehicle of technology transfer, contributing more economic growth than domestic investment where they make a case of minimum sceptre stock of human capital necessary to absorb foreign technologies and linkage between FDI and human capital and domestic investment are crucial to achieve the economic growth. Other subsequent studies by Subramanyam et al., (1996) within the growth theory frame work canvas the role of FDI in growth process in the context of 46 developing countries with different swap policy regimes. From their cross-se ctional panel data analysis, they found that countries that pursue all outwardly oriented trade policies are strongly benefited from FDI than those countries adopting an inward oriented policy.De Mello (1996) based on neoclassical approach argue that FDI affects only level of income and leaves long run growth unchanged. They argue that technological progression and other external factors main source of economic growth. Their argument is that long-run growth arises because of technological progress and population growths both were exogenous. Hence, according to neoclassical models of economic growth, FDI will only be growth advancing if it affects technology positively and permanently.Endogenous growth theorists believe that economic growth is generated from within a system as a direct result of internal process. Aghoin and Howitt(1998) the sweetening of nations human capital by investing more on human capital formation would lead to faster economic growth. The recent endogenous mod els show that FDI can affect growth endogenously growth models if it generates increasing returns in production via externalities and spillover effects Deme and Graddy (2006). In these models, FDI is thinked to be an important source of human capital and technological diffusion.According to Romers (1990) endogenous growth model growth is driven by technological change from intentional investment made by profit maximizing firms. He argues that stock of human capital determines the rate of growth. In his control, there is increasing returns scale (IRS) in compound level where as constant returns to scale (CRS) in the firm level and firms dont take account of spillover effect of externalities but economy as a whole experiences the increasing returns to scale which causes the endogenous growth. Endogenous growth theoreticians FDI and trade stimulate the technological diffusion and contribute economic growth.Barell and Pain (1996) studied the econometric model of foreign direct invest ment and examined the extent to which the model explain the level of outward direct investment by U.S companies over last two decades. Their analysis show that market size and factor cost, both labor and capital are important factors in the investment decision because MNEs are trying to maximize the value of the firm by allocating the resources in right place.Feder et al. (1983) analyzed export-led economic growth hypothesis. They argued that exports increase factor productivity because of the better utilization of resources and economies of scale. Some economists argue that open trade policies foster FDI because of the conducive economic climate for the MNEs. In this regard, Rodrizguez and Rodrik (1999) presented a atheistical view by linking between opentrade policies and economic growth. They argue that previous studies didnt consider the institutional differences among countries in an upwardly biased estimate of trade and other policy restrictions. Their analysis showed that th e relationship between average tariff rates and economic growth is only slightly negative and nowhere near statistical significance.The issue whether FDI and trade trigger economic growth or economic development attracts FDI and trade is unsolved (Makki and Samwaru, 2004) since past studies were one sided i.e. analyzed the impact of FDI and trade on economic growth (Borensztein et al, 1995 and Balasubramanyam et al, 1996) or analyzed the effect of economic growth on FDI (Barrel et al, 1996).The recent study on role of FDI in economic by Kim and Hwang (2000) focused on spillover effects in different six sub sectors. They examine the effects by using random effects model employing the annual data for the period of 1970. They find that FDI played a negligible role through out Koreas economic development. Despite the quantitative insignificance of FDI, they accepted the qualitative role of FDI on Korean economy by knowledge spillover from foreign firms.Dhakal et al. (2007) conducted a r esearch on relationship between FDI and economic growth using farmer causality test for 9 Asiatic countries where they find there is no direct causal relationship in two countries, causality ran from growth to FDI in 5 countries including South Korea and causality ran from both sides in two countries.Kim and Seo (2003) analysed the dynamic relationship between FDI and economic growth and domestic investment in Korea for the period of 195-1999 using vector auto regression model. They found that there some positive effects of FDI on economic growth but insignificant. However, their findings show that domestic investments negatively affected by FDI shock, and FDI does not crowd out domestic investment in Korea.In a recent survey of the literature, Hanson (2001) argues that evidence that FDI generates positive spillovers for host countries is weak. In a review of micro data on spillovers from foreign-owned to domestically owned firms, Gorg and Greenwood (2002) come to an end that the effects are mostly negative.Lipsey (2002) takes a more favorable view from reviewing the micro literature and argues that there is evidence of positive effects. Surveying the macro empirical research led Lipsey to conclude, however, that there is no consistent relation between the size of inward FDI stocks or flows relative to GDP and growth. He further argues that there is need for more consideration of the different batch that obstruct or promote spillovers.This study revisits the FDI and economic growth relationship by examining the role FDI inflows play in promoting growth in the main economic sectors, namely Agricultural, manufacturing, and services. Often-mentioned benefits, such as transfers of technology and management know-how, access of new processes, and employee training tend to relate to the manufacturing sector rather than the gardening or mining sectors.For example, the a priori work of Findlay (1978) and Wang and Bloomstrom (1992) that models the importance of F DI as a conduit for transferring technology, relates to the foreign investment inflows to manufacturing or service. He warned that in the absence of linkages, foreign investments could have limited effect in spurring growth in an economy.About the consequences in potential linkages effects differences in manufacturing and agriculture, Hirschman (1958110) wrote, the absence of direct linkage effects of primary production lends these views (enclaves) a plausibility that they do no have in the case of foreign investment in manufacturing. More recently, the theoretical work on linkages, by Rodiguez-Clare (1996), shows that multinationals intensive use of intermediate goods enhances production efficiency in host economies. In this framework, increased demand for inputs leads to a positive externality to other producers owing to an increase in variety. Greater varieties of inputs, however, seem to be more relevant to the manufacturing than to the unsophisticated sector.In addition, FDIs potential to create linkages to domestic firms, as Albert Hirschman (1958) described in his seminal book on economic development, might also vary across sectors. Hirschman (1958109) emphasized that not all sectors have the same potential to absorb foreign technology or to create linkages with the rest of the economy. He noted, for example, linkages are weak in agriculture and mining. However, seem to be more relevant to the manufacturing than to the agricultural sector.Markusen and Venables (1999) analyze the effect of foreign firms on the development of domestic firms in the industrial sector. In their model, foreign companies compete with domestic producers while creating additional demand for domestically produced intermediate goods through linkages with local suppliers. This can lead to domestic firms entering into the intermediate goods sector, which can result in lower costs that, reflected in lower net prices that increase demand, can benefit domestic firms producing final g oods.Proposed Research Work debate of ProblemToday, India stands as one of the fastest emerging economies in the world. The country has a land of 3,287,240 Sq Km with 1,188,859,000 populations. India enjoys a per capita income of US $757 ( universe of discourse Bank, 2009) as compared to US $ 318 in the pre liberalisation era. This study explores the role of FDI in this remarkable growth of India as well as the growth of every sector of the Indian economy.FDI has been seen one of the big resources for industrial development in India over the years. FDI stock increased to US $ 34.577 billions in 2009 from US $ 236.690 millions in 1990 (WIR, 2009) and has gained the name of The Asian Tiger. It is interesting to explore the impact of FDI on the rapid growth of Indian economy.Despite the natural resources availability in the country, economic policies and political environment also influence the inflow of foreign investments in the countries. The theoretical belief of impact of FDI is that FDI does not only bring capital but also it brings technology, knowledge and due to the spill over effect development of process remains for the long run. FDI works as the catalyst for the economic growth of a country, especially for the developing countries. FDI is not only a wizard factor determining the economic growth, rather foreign trade, domestic investment, employment level, government consumption are also major factors affecting growth. On the other hand, stock of human capital is factors determining the level of FDI inflow besides the resources accessible in the host countries. How the growth is affected by these versatiles? Does high level of FDI increase the higher level of economic growth? What would be the interaction between FDI and Trade, human capital and domestic investment? The study examines the effect of this variable in economic growth.Purpose of this studyAt a theoretical level, FDI brings both capital and technology which makes the local firms more co mpetitive and encourages the economic development in the faster way.The spill over effect of foreign companies will have a long-term effect in the host countries. In the practical level, this study explores the role of FDI in economic growth in India. This study explores, whether FDI plays a role in economic growth or not? Another precedent for the study is to compare the rate of growth of the key sectors of the Indian economy.India is able to attract a significant amount of FDI among Asian countries. This study verifies the theoretical model of endogenous growth theory of economic growth by using the macro economic figures of India. The present study examines the empirical estimate of the impact of FDI in difference of growth rates of Agricultural, Manufacturing and Service sectors of India as well as the growth of the economy as a whole over the period of 2000-2010.Scope of the StudyForeign Direct Investment has emerged as a major macro economic indicator of the growth of an ec onomy. In recent years, the Indian Economy has opened up to foreign flows at a tremendous rate. These foreign inflows have contributed to the overall development of the economy in areas like technology, innovations and human capital formation but are being hindered by high rates of inflation, low yields, wishing of infrastructure, skilled labour as well as low per capita GDP in various sectors.The study is aimed at analyzing the impact of FDI on the growth in various sectors considering the control factors. The research will also provide insights into the lop-sided flow of FDI in some sectors as compared to others. The impact of flow of FDI on the growth of Indian economy will also be estimated over the period of 10 years from 2000-2010. The study tries to explore the question whether high level of FDI cause higher level of economic growth.Research methodological analysisThis section describes the research methodology of the study which explains the conceptual framework, research d esign, data collection method and data analysis methods of the study.The main objective of the study is to compare the difference in growth rates among the Agricultural, Manufacturing and Service Sectors of the Indian Economy over the period of 2000 to 2010. India received a huge amount of FDI and achieved high economic growth rate with gradual liberal trade policy regimes. This study analyzes the linkage between FDI and economic growth in India.Conceptual Frame workBasically, the conceptual frame work of the study is derived from the works of Borensztein et al. (1998), Carkovic and Levine (2002), and Alfaro et al. (2003). They have shown the impact of FDI on economic growth in the following linkage.Source Adapted from How does foreign direct investment affect economic growth?References and further reading may be available for this article. To view references and further reading you must purchase this article.E. Borensztein, J. De Gregorio and J-W. LeeAccording to their argument, Fo reign Direct Investment accelerates capital accumulation in host country by increasing count investment and lowering the cost of innovation and indirectly by crowding in domestic investment and scarce resources of the economy and productivity is enhanced by technology transfer but it is constrained by human capital in the host economy. They argue that FDI develops stock of human capital. There should be a linkage between domestic investment and human capital to achieve the higher productivity.Research Methodology and ModelThe present study is focused on the compare the difference in growth rates among the Agricultural, Manufacturing and Service Sectors of the Indian Economy over the period of 2000 to 2010. Only secondary data are used for the analysis of the research objectives. The uneven inflow of foreign capital and growth of certain sectors in the economy in India has attracted the research interest on it.This study employs the endogenous growth theory as genuine by Balasubram anyam, Salisu and Sapsford, 1996 and Borensztein, Gragorio and Lee 1998. This model assumes that FDI contributes to economic growth directly through new technologies and other inputs as well as indirectly through improving human capital, infrastructure and institutions and countrys level of productivity depends on FDI, trade and domestic investment. The impact of overall FDI inflows on economic growth can be based on the following comparabilityGrowth= 0 + 1 Initial GDP + 2 Controls + 3 FDI + vi here(predicate) Growth is the dependent Variable which equals per capita GDP, FDI and the control factors.For most of the variables in the regression, the determine represent the average of the period for which sector FDI is available. The variables are determined as followsOutput levels and growth Output level and growth data reflect the growth of real per capita GDP (in constant 1995 US$). Source humanity Bank knowledge Indicators (2001).Foreign Direct Investment FDI inflows are by and large defined as the measure of the net inflows of investment needed to tackle a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI by sector as a % of GDP was used in the regression analysis. Sources For OECD countries, the outside(a) Direct Investment Statistics Year Book (2001) FDI by sector for other countries in the sample was calculated using UNCTADs World Investment Directory (7-volume series 1992-2000).Government Spending Comprises general government final consumption expenditure as a percentage of GDP. Source World Bank Development Indicators (2001).Inflation Percentage changes in the GDP deflator. Source World Bank Development Indicators (2001).Institutional choice (INSTQUAL) Institutional Quality is measured as the average of the 12 sub-indices of Political Risk as measured by the International untaught Risk Guide Government Stability, Socio Economic Conditions, Investment Pro file, Internal Conflict, External Conflict, Corruption, Military in Politics, theology in Politics, Law and Order, Ethnic Tensions, Democratic Accountability, and Bureaucracy Quality. Source International Country Risk Guide (ICRG).Inflation Percentage changes in the GDP deflator. Source World Bank Development Indicators (2001).Openness Trade Openness is defined as the average of exports and imports as a percentage of GDP. Source World Bank Development Indicators (2001).Private credit (PRCREDBANK) The value of credit by financial intermediaries to the private sector divided by GDP, this variable excludes credits issued by central and development banks and credit to the public sector as well as cross claims of one group of intermediaries on another. Source Levine et al. (2000).Schooling Average years of secondary schooling of the total population. Source Barro and Lee (1996) and World Bank Development Indicators (2001).The same equation can be used to determine the economic growth in each of the sectors of the Indian economy.Based on the results obtained, relevant conclusions can be drawn about the growth rates in the Agricultural, Manufacturing and Service Sectors of the Economy and the difference between them. Analysis of the FDI over the period of 10 years can also be derived by employing the equation to each year.The stock of efficient human capital is required to absorb the technologies brought by FDI and it determines whether the potential spillover effect is realized. The host country requires sufficient number of human capital to utilize the technologies brought by FDI, meaning that higher the level of human capital in the host country, higher the effect of FDI in economic growth of the host country. The study assumes a positive relationship between FDI and GDP growth rate as well as a positive interaction between FDI and human capital in accelerating the economic growth. The issue relating to the interaction between FDI and domestic investment it is as sumed that there is positive interaction between FDI and domestic investment because FDI has is considered as an important metier for transferring capital, technologies and host countries that encourages the domestic investment level.This study uses the time series data for the period of 2000-2010 for the analysis of the objectives and uses the multivariate regression analysis (OLS) for the analysis of data. entropy Collection Method and SourcesThe research is based on Secondary sources of data Collection.Detailed information on FDI by sector for India is available in OECDs International Direct Investment Statistics Yearbook (2009). The OECD data can be complemented with information obtained from the World Investment Report seven volume series by UNCTAD, each volume of which contains FDI information for countries from different regions (e.g., Asia and the Pacific, Africa, Latin America, and the Caribbean, etc.).The per capita growth rate of output is measured as the growth of real per capita GDP in constant dollars using data from the World Banks World Development Indicators (WDI) (2009). Inflation, measured as the percentage of change in the GDP deflator and used as a proxy for macroeconomic stability, is taken from WDI (2009) as well. In order to capture institutional quality and stability, data from the International Country Risk Guide (ICRG), a m