IIFT International Business and Management Review Journal

Inter-linkage between FDI Outflow and Manufacturing Sector Growth in India: Role of Price and Other Selected Economic Factors

Khushi Gupta¹, Saswata Chaudhury¹, Souvik Bhattacharjya¹ and Raktimava Bose¹

First Published 24 Jul 2023. https://doi.org/10.1177/jiift.221150594

Article Information

Volume 1, Issue 1 June 2023

Corresponding Author:

Khushi Gupta, Integrated Policy and Analysis Division, The Energy and Resources Institute (TERI), C-11, 38/39, Sector 3, Near NDPL Office, New Delhi, Delhi 110003, India.
Email: khushi.gupta@teri.res.in

¹Integrated Policy and Analysis Division, The Energy and Resources Institute (TERI), New Delhi, India

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 License (http://www.creativecommons.org/licenses/by-nc/4.0/) which permits non-Commercial use, reproduction and distribution of the work without further permission provided the original work is attributed

Abstract

The manufacturing sector in India has increasingly grown over the period of last 20 years. Various factors like interest rate, inflation, government interventions, technology and finance affect the growth of a sector; but this article focuses on foreign direct investment outflow (FDI outflow), consumer price index (CPI) and real effective exchange rate (REER) to assess the impact of these factors on the growth of manufacturing sector of India in particular. This study employs a cointegration model and vector error correction model to analyse the impact and also the Granger causality test to determine causality between them over a time period of 20 years, which is from 2000 to 2019. The results indicate second-order cointegration and no short-run relationship among the variables, whereas there is existence of a long-run relationship. The findings of the article affirm the idea that FDI outflow has the potential to contribute to the growth of the manufacturing sector in India. Also, through proper management of REER and control of CPI, the impact of FDI outflow on the manufacturing sector growth can further be augmented.

Keywords

Foreign direct investment, consumer price index, manufacturing sector, growth, real effective exchange rate, cointegration, vector error correction model

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