The Causal Nexus between Foreign Investment and Economic Growth in India

There is an ongoing debate about the impact of inflow of Foreign Direct Investment (FDI) on economic growth in a closed country. This is mainly due to two diversified views pertaining to the relationship between FDI and economic growth. The main arguments in favour of FDI promoting economic growth are: (1) The superiority of multinational corporations (MNCs) over local firms. Output per worker in MNCs taken as a group is often many times greater than in local owned operation. Wages paid by foreign affiliates are also higher than local owned operations in both developed and developing host countries, within the same industries and the same locations. (2) A shift towards greater use of non-equity and cooperative relationships with other enterprises such as alliances, partnership, management contracts or subcontracting arrangements serve corporate objectives. They can provide better access to technologies or other assets, allowing firms to share the cost and risk of innovatory activities and can reduce the production cost of labour-incentive products. (3) Emergence of a network type of organisation expands the scope of interactions between MNCs and enterprises from host countries which will create international economic integration. (4) MNCs create an integrated international product system through FDI. This will broaden the range of resources sought by MNCs in host countries, making firms more selective in their choices. This can also encourage FDI in countries that cannot provide a wide range of resources but have some specific advantage (accounting, technology, products, etc.).