Impact of Foreign Direct Investment on Manufacturing Sector: Evidence from Indian Economy

Abstract

There is need for an additional source of finance in form of foreign direct investment (FDI) in the Indian manufacturing sector due to its long-term engagement between the investors and the host country. Further FDI in the manufacturing sector is gaining importance because of the benefits the manufacturing sector reaps as a result of technology spillover brought through FDI. Therefore the objective of the study is to assess the impact of Foreign Direct Investment on the manufacturing sector output of the Indian economy for the period of 1991–2020. Methods such as bounds test, Autoregressive Distributed Lag Model (ARDL) and Granger causality are used to study the impact of FDI and the interaction of FDI and human capital as two different variables on the output of the manufacturing sector in the Indian economy. Also, the technology-enhancing effect of FDI is addressed in the current study. The results of the study reveal that the inflow of FDI leads to an increase in manufacturing sector output. Further, it concludes that the higher the level of education (human capital) and the greater the technology gap between host and home country, the more is the technology spillover, and hence more prominent is the impact of FDI on the output of the manufacturing sector.