Locating the Home Country Macroeconomic Determinants of FDI Outflows from India: An Empirical Analysis
The relatively recent phenomenon of outward/overseas FDI flows by the developing countries has generated much interest and concern among the policy makers, industry organizations, scholars and the popular press, alike. Like many other liberalized developing countries, India too is demonstrating an enormous rise in its outward FDI flows after the streamlining of procedures of FDI outflow in 1994 and more so since 2000. Economic literature suggests that a country may want to make overseas FDI because of certain home country microeconomic and macroeconomic policy variables that compel or induce it to make outward investment. These include the supply side push factors that drive the firms to make market-seeking, efficiency-enhancing and resource-augmenting FDI abroad. The developing countries may also possess some unique macro economic and regulatory environment that either create situations for the crowding out of domestic investment from the country or may generate favorable economic conditions prompting the domestic firms to look for opportunities beyond their national boundaries. While there has been some intensive research in India to locate the micro level push factors, not much research is evident on the macro-level determinants of overseas FDI. This paper intends to identify the endogenous macroeconomic and policy-related push factors that are prompting the Indian firms to make FDI abroad. The research will be carried out in terms of a time series analysis for India over 1970-2003 on the basis of data primarily from the UNCTAD, World Bank and the Reserve Bank of India. We will include 9 explanatory variables including a dummy variable representing regulation and a time trend variable. We will test the individual as well as collective economic and statistical significance of each explanatory variable and explain the implications. We will then conduct a principal component analysis for checking the multicollinearity and also to reduce the number of explanatory variables to few major ones.
Keywords: Outward/Overseas FDI Flows, Push Factors, Macro-Level Determinants, Principal Component Analysis, Multicollinearity
Dr. Nandita Dasgupta
Faculty, Economics Department, University of Maryland