IMPACT OF ECONOMIC REFORMS ON FDI IN INDIA: ANALYSIS OF DATA

ANALYSIS OF DATA

In order to identify the association between Foreign Direct Investment, Economic Growth and other macro economic variable, the correlation matrix for the entire sample has been computed and the results turned out to be in the expected direction for most of the variables. A few variables showed high degree of association, which were taken care of while conducting stepwise regression analysis.

LINEAR GROWTH RATE

The Linear growth rate of FDI and other macro economic variables have been computed and provided in table 3 for the entire period 1971 to 2009 and sub- periods i.e. 1971 to 1991 and 1992 to 2009.i.e pre and post reform period. The regression equation used to calculate the linear growth rate is

Ylt = a + bT + eit

Where Ylt = FDI and other macroeconomic Variable , T = time variable a and b are parameters to be estimated, e = error term

Table 3 provides the Linear growth rate of FDI and other Macro economic variables in India for the year 1971 to 2009 and also the growth rate of pre reform period (1971-1991) and Post reform period.

Table 3Linear growth rate of FDI and other Macro economic variables

Indicators 1971-2009 1971-1990 1991-2009
FDI 19.9 8.5 16.7
GDP 5.4 4.3 6.8
Export 9 6.2 10.8
Exchange rate 6.2 4.8 2.5
Employment 0.3 0.1 0.5
Infrastructure 9.3 6.1 9.3
Attraction 17.6 13.6 26.8

The results of linear growth rate for pre and post reform periods reveal that the growth rate of most of the macro economic variables is higher during the post- reform period than the pre- reform period. Hence, the results of linear growth rate indicator clearly reveal that India is successful in implementing the financial sector reforms.

THE IMPACT OF ECONOMIC REFORMS ON FDI IN INDIA

The following multiple linear regression analyses were carried out to examine the impact of economic Reforms on FDI with few macro variables in India

Y = a + bj Xj + b2 X2 + Ьэ X3 + b4 X4 + b5 D + ut

Where,

Y= fdi,

Xi= Gross Domestic Product X2= Export X3= Exchange rate X4= Labour Force

D = dummy variable representing ‘0’ for pre-reform period (1971-1991) and ‘1 ’ for the post reform period (1992-2009).

U = random error term.

The analyses of the impact of economic reforms on FDI for the period 1971 to 2009 has been presented in table 4 according to which GDP, export and exchange rate significantly contribute to FDI . The time dummy is significant and positive, which implies that liberalisation had an impact on FDI i.e. after 1992 there is a significant contribution of FDI to Indian economy. The coefficient of Determination R2 tells us the proportion of variation in the dependent variable explained by the explanatory variables is 0.95 i.e. the fitted regression line explains 95 percent of the variation in Y. The F value, which is a measure of the overall significance of the estimate regression, is significant at 1 percent level.

Table 4The Impact of Economic reform on FDI

Variable Coefficient T-statistic
Constant -31.19 -2.97*
GDP 6.07 4.12*
Export -2.53 -3.11*
Exchange rate -0.935 1.89*
Labour -11.97 1.29
T ime dummy 3.162 5.29*
R2 0.95
F 131.53*

*,** and *** significant at 1, 5 and 10 percent levels

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