THE DETERMINANTS OF INDIA’S FDI INFLOWS: THE BOUND TEST ANALYSIS

Purpose of the study: This paper aims to empirically examine the determinants of FDI inflows which include policy factors along with macroeconomic aggregates prevailing in India that serve as an important factor for attracting FDI in the country. Methodology: This paper has applied the Auto Regressive Distributed Lag (ARDL) modeling technique to empirically examine the co-integration relationship among FDI inflows and various macroeconomic aggregates prevailing in India to determine the factors affecting the flow of FDI in India. Main Findings: The study finds that there exists a co-integration relationship between the variables in the model. The estimated coefficient reveals that FDI inflows in India are positively influenced by trade openness, domestic investment, moderate domestic prices and exchange rate in the long-run. The outcomes also reveal that FDI inflows are positively influenced by the past level of FDI inflows, the past year of GDP per capita, past level of trade openness and currency exchange rate in the country in the short-run. Applications of the study: The study will be helpful in the formulation of suitable policies towards foreign investment inflows and to optimize its role in the host country. The study will be also helpful to the government for the enrichment of socioeconomic overheads in the host country to maximize the gains from FDI inflows. The novelty of the Study: The outcome of the study with an addition to the existing literature by incorporating the new variables in the model provides a new variable specific influence on FDI inflows in the country. This will also provide a scope for further study by establishing backward and forward spill over effects of FDI inflows in enhancing income, output, and employment in the country.