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Potential for foreign direct investment and its role in foreign direct inflows

Author

Listed:
  • Pooja Sharma

    (University of Delhi)

  • Sunita Gupta

    (University of Delhi)

  • Devika Kapoor

    (Imperial College)

Abstract

Foreign direct investment (FDI) plays a critical role in economic growth and development. It is imperative to examine factors such as socioeconomic, political, and environmental factors that are responsible for determining the potential to attract foreign investment. The paper attempts to evaluate the attractiveness of FDI in India in other words, the potential of India to attract foreign direct investment. Secondly, the study investigates the role of FDI potential in the real FDI inflow in the country. The paper constructs a comprehensive index for the attractiveness of foreign direct investment for India, which reflects the preparedness or potential of the country to provide a conducive environment for foreign investments. The study adopts principal component analysis (PCA) to formulate an index that reflects socioeconomic, political, and environmental aspects of FDI. Appropriate indicators are used to reflect all the dimensions, such as social, political, environmental, economic, infrastructure, and human capital. By regressing the FDI potential index on the interest rate, final consumption, public–private partnership, and potential for FDI on actual FDI inflow, the role of FDI potential is highlighted. It is revealed that FDI potential and FDI inflows are significantly positively correlated as well as significantly positively determine the FDI inflows as revealed by the regression results. Therefore, infrastructure, socioeconomic factors, and human capital also ensure political stability and governance are favorable in promoting more FDI inflow. In addition, the policies favoring public–private partnership and supporting all dimensions of FDI potential index must be promoted.

Suggested Citation

  • Pooja Sharma & Sunita Gupta & Devika Kapoor, 2024. "Potential for foreign direct investment and its role in foreign direct inflows," International Economics and Economic Policy, Springer, vol. 21(4), pages 985-1000, October.
    • Handle: RePEc:kap:iecepo:v:21:y:2024:i:4:d:10.1007_s10368-024-00624-w
    DOI: 10.1007/s10368-024-00624-w
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    References listed on IDEAS

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