Niti Bhasin

Outward FDI from India: the Role of Host Country Factors

Abstract Overseas investment from developing Asian countries has gathered considerable attention in recent times. This paper examines the role of host country factors in attracting outward Foreign Direct Investment (OFDI) from India using panel data for fifteen host countries over the period 2000–09. Using a Least Squares Dummy Variable model, the results show that that pull factors like technology, bilateral investment treaties and FDI openness of the host countries are significant determinants of OFDI from India. We also find that Indian OFDI has remained resilient during the economic recession of 2007.

Home Country Determinants of Outward FDI: A Study of Select Asian Economies

Since the early 1990s, developing countries have seen a rapid growth in their outward investments. The share of South, East and South-East Asia in global outward FDI has substantially increased in the last two decades. Due to the increasing importance of this region in global outward FDI, this paper attempts to examine the home country determinants of outward FDI in ten select economies of the region. With the help of panel data for the period 1991-2010, this paper models the role of home country “push” factors in promoting outward FDI. A fixed effects (Least Squares Dummy Variables (LSDV)) model is developed that captures market conditions, policy variables, economic variables and production factors. We have also used Principal Component Analysis to augment the model’s analytical richness. The results indicate that GDP and FDI openness are important home country factors affecting outward FDI. Countries with high GDP and a more liberal and open FDI policy have larger FDI outflows.

The impact of bilateral tax treaties: A multi-country analysis of FDI inflows into India

This paper models the role of tax treaties in promoting foreign direct investment (FDI) with the help of panel data for 14 countries for the period 1993–2011. A fixed effects (least squares dummy variable) model is developed that captures macroeconomic factors such as gross domestic product (GDP) and per capita income (PCI) in ratio form of home to host country. It also includes bilateral tax treaties as a determinant of FDI inflow. The results show that GDP is a major determinant that is demand driven and per capita income is a major determinant that is supply driven. FDI openness of the home countries and population are also significant determinants. The introduction of the treaty had a positive impact on FDI inflows into India. We get largely significant and positive results for the ‘age of the treaty effect’, especially, in the case of Germany, Switzerland and Japan. The main contribution of the paper is to show that both presence and ‘age of treaty’ are important determinants of FDI flows to India. Further, fundamentals like GDP and PCI are major variables that influence FDI inflows.

Understanding the Indo-Japan Economic Relations in the Asia-Pacific Century

A period when the world’s economic gravity is shifting to the Asia-Pacific region with the promise of an Asia-Pacific twenty-first century, Japan is increasingly facing pressure to maintain its economic and political position vis-à-vis China. To minimize any adverse impact, Japan needs to expand its economic horizon crossing the hitherto established boundary, importantly focusing on one or more countries to increase its strategic depth in the international economic relationship. India seems to be uniquely placed to get Japanese attention for such engagement for a number of advantageous factors it holds. With a vast population, diverse demography, increasing economic promise, democratic governance, soft power and physical location at the core of South Asia, India makes a bona fide contender to play an important role in the emerging global order. This article argues that a deeper economic cooperation between Japan and India can benefit Japan Inc. through the expansion of economic space, on one hand, and may accelerate India’s rise in the global order, on the other. But for a cooperation of mutual betterment, both countries need to position themselves for becoming complementary to each other. They will face a number of barriers at both ends though.

Do Bilateral Investment Treaties Promote FDI Inflows? Evidence from India

Executive Summary In view of the catalytic role of foreign direct investment (FDI) in promoting economic development, countries adopt various unilateral as well as bilateral arrangements to create a conducive environment for FDI. One such significant form of arrangement is bilateral investment treaties (BITs). As sizeable cost and resources are involved in treaty formation, it becomes important to examine the potential benefits of BITs for investment and whether such measures actually translate into higher FDI flows. This article employs panel data regression on an augmented gravity model (under both static and dynamic conditions) to identify the determinants of FDI inflows into India with a special focus on the role of BITs. The panel data span over the period 2001–2012 and include the top investing countries in India accounting for around 92 per cent of India’s total FDI inflows. The explanatory variables employed are extended market size, vertical FDI drive, distance, colonial links, common language, political stability, financial openness, and population growth rate. BIT is incorporated as a dummy variable which takes the value 1 if a BIT exists between India and the investing countries in a given year, otherwise 0. The results for both the fixed effects and the two-step generalized method of moments (GMM) model specifications confirm the positive role of BITs in attracting FDI inflows into India. BITs have contributed to rising FDI inflows by providing protection and commitment to foreign investors contemplating investment in India. The model also finds support for other factors facilitating FDI such as the large size of the economy and a more liberal FDI regime. As attracting FDI is an important policy objective of developing countries like India, the results imply that one of the instruments of achieving this objective is for the government to negotiate BITs with countries which are prospective investors. By laying down clear guidelines with respect to investment and widening the scope of investment activities covered under a bilateral agreement, an environment of certainty is created which would facilitate FDI flows.

The Impact of Bilateral Tax Treaties on FDI Inflows: The Case of India

Foreign direct investment (FDI) inflows are driven by both home country and host country conditions. It is for the host country to provide a conducive environment to FDI. Many developing Asian economies, including India, have redesigned their tax systems to make them internationally competitive. Bilateral tax treaties are seen as an instrument of policy that makes this possible. Tax treaties alleviate the problem of international double taxation. They create an environment of fiscal and legal certainty. This paper examines the FDI inflows to India from 14 countries that are major partners. With the help of panel data for the period of 1993-2007, this paper models the role of tax treaties in promoting FDI. A fixed effects (LSDV) model is developed that captures macro-economic factors and policy factors such as openness. We have also used Principal Component Analysis to augment the model’s analytical richness. The model estimates shows that FDI inflows into India have been growing due to macro-economic variables, and policy variables including tax treaties. The results show that FDI to India is driven by supply and demand determined factors. It is market seeking and efficiency seeking. It is facilitated by tax treaties. The introduction of the treaty has had a positive impact and FDI flows have jumped due to the treaty. We get largely significant results for the ‘age of the treaty effect’, it clearly shows that in the case of Mauritius, UK, Singapore, Switzerland, UAE and Italy FDI flows to India accelerated after implementation of tax treaties. There is very small but significant and positive effect of tax treaties.

Does Host Country Institutional Quality Act as a Differentiator in Intra-regional FDI? Evidence from Selected Asian Economies

With primary considerations such as trade and investment openness becoming similar for many economies due to globalization, the role of other factors such as institutional environment in promoting investment has captured increasing attention in recent times. In view of the growing importance of Asia as a prospective foreign direct investment (FDI) destination, we employ panel data regression data for 16 Asian economies over the period 2000–2012 to study if institutional quality affects FDI flows and stocks and whether it can act as a differentiator while selecting a location within Asia. Among the institutional variables employed, ‘political stability and absence of violence/terrorism’ were found to be significant determinants revealing the importance of a stable and safe political environment for FDI. However, ‘corruption’ and ‘regulatory inefficiency’ were found to affect FDI inflows positively, indicating the preference of foreign investors for a system where laws can be circumvented easily through corrupt bureaucracy and where regulations are weak or less stringent. JEL: F21, F23, O43, O53

Macroeconomic impact of FDI inflows: an ARDL approach for the case of India

Abstract This article investigates the dynamics of relationship between foreign direct investment (FDI) inflows and major macroeconomic variables, i.e. gross domestic product (GDP), exports and exchange rate for India. Using annual time series data, the empirical analysis has been carried out for the period 1980–2012. Using the most recent autoregressive distributed lag (ARDL) testing approach to cointegration proposed by Pesaran et al., 2001, the study concludes that there is a strong evidence of long-run relationship between variables with GDP, FDI inflows and exports as the dependent variable. However, there is lack of evidence of long-run cointegration with exchange rate as a dependent variable. The results indicate bilateral positive and significant relationship between FDI inflows and GDP; and GDP and exports in the long run and short run. In contrast, the result analysis indicates negative impact of FDI inflows on exports in the long run. Moreover, exchange rate appreciation has a positive impact on FDI inflows and exports, but negative on GDP in the long run. The error-correction term (ECT) for the models signifies a fairly quick speed of adjustment to the equilibrium following a shock. Furthermore, the study also observes long-run causality running from the explanatory variables towards the respective dependent variables.

Motives as Locational Determinants: A Study of FDI between India and LAC

Abstract This paper addresses the issue of motives as locational determinants of foreign direct investment (FDI) flows from India to the Latin American region. India and the Latin America and Caribbean (LAC) have emerged as important centers of global FDI but have traditionally had insignificant FDI flows between them. The paper is a pioneering study examining motives of the newly emerging FDI relationship between India and the LAC region. The study uses a firm level data base across seven countries and multiple industries in an augmented gravity framework. It contributes to the literature on emerging markets as it concludes that FDI flows from India to the LAC are both asset seeking and asset exploiting, bridging the gap between traditional and modern explanations of FDI. Using a negative binomial regression model the study establishes that FDI flows dominate from the information technology and pharmaceutical industries and are market-seeking for nearshore advantages to the USA and strategic asset seeking for patents and technology

Foreign Institutional Investment in India: Determinants and the Impact of Crises

This paper identifies the determinants of FII inflows to India by taking various ‘push’ and ‘pull’ factors as well as two dummy variables to account for the financial crisis of 1997 and 2008. Starting with a multiple regression framework, we then employ the principal component analysis to augment the model’s analytical richness. Our results indicate the important determinants as returns on MSCI Emerging Market Index, past values of FII inflows and Index of Industrial Production (IIP). Further, the crisis of 2008 is found to have a significant impact on net FII flows.