Article : Direction Of Causation Between FDI And Economic Development In India During Post-reforms Era (1991-2010): A VAR Modeling Approach

Title

Direction Of Causation Between FDI And Economic Development In India During Post-reforms Era (1991-2010): A VAR Modeling Approach

Author

Seshanwita Das, Tapas Das

This paper empirically studies whether simultaneous equation modeling is possible between Foreign Direct Investment (FDI) and economic development (GDP) in India, that is, whether or not, both the variables had an endogenous relationship between them during the period (1991-2010), on the backdrop of a common knowledge that FDI causes economic development (FDI-led growth) through development of the real sector and FDI inflow also comes in at a huge volume at the time of economic prosperity (Growth-led FDI). From the analysis of data during this period, we saw that each variable had an endogenous relationship between them, as confirmed by ‘Hausman Test of Endogeneity’. Moreover, change in FDI Granger-caused change in economic development as well as change in economic development Granger-caused FDI inflow to have a cascading effect on each other, which is evident from ‘VAR Granger Causality/Block Exogeneity Wald Tests’, explicitly establishing bi-directional causality between FDI and economic development during the study period’.

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