IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH : A STUDY ON BRICS NATIONS

Abstract

Over the past three decades, the world economy has witnessed an increasing trend of global economic integration. It has seen an escalating internationalization with expanding levels of cross- border trade and growing volume of foreign investment flows, direct investment in particular. However, the impact of this globalization has not been uniform across sectors, regions and countries. Some regions and countries have been able to get more intertwined with the world economy and as such have witnessed ever increasing magnitudes of Foreign Direct Investment (FDI) inflows, while others have been left relatively unaffected. The BRICS (Brazil, Russia, India, China and South Africa) nations are a notable example of such worldwide economic shift that is evolving today. Based on the review of available literature and background of the study, the study aims to analyze the causal relationship between FDI and economic growth in Brazil, Russia, India, China and South Africa individually; to ascertain significant determinants (both economic and institutional) of FDI inflows in Brazil, Russia, India, China and South Africa individually; to estimate the most significant determinants impacting the FDI inflows in BRICS nations as a group and to examine the trends and patterns of macro- economic environment and institutional quality, challenges and future prospects of BRICS nations. To fulfill the above mentioned objectives, the study has primarily employed Granger’s Causality Test, Multiple Regression Analysis, Panel Data Analysis and Trend Analysis wherein only secondary data has been used (represented by both economic and institutional determinants respectively). The period used for the study covers more than three decades, i.e. 1983-2015 (except for Russia for which only 20 years are included because the data is available from 1995- 2015) to get a comprehensive view of the performance of BRICS on account of both the economic and institutional indicators. The collected data is analyzed with the help of software like EViews (Version 7.0), STATA (Version 12.0), SPSS (Version 21.0) and MS- Excel. After the econometric analysis on the secondary data, the study further conducts interviews with the policy makers (government officials at Ministry of Finance and Ministry of Commerce and Industry, v

Government of India) as a part of primary data analysis to derive conclusive statements about the said objectives of the study. The findings of the study suggest that it is indeed the economic growth that positively impacts the FDI inflows in the BRICS nations rather than the opposite. It is found in this study that the economic growth, that is represented by the economic and institutional determinants, has been successful in attracting FDI inflows over the years with the varied magnitude and significance levels) in Brazil, Russia, India, China and South Africa individually and commonly in the BRICS group. The study helps to address an intriguing question ‘why should an MNC make FDI in BRICS’ by identifying the strengths and weaknesses of each of the five countries. The study also contributes to the literature by identifying the factors representing the institutional quality of the BRICS nations along with the economic determinants. The study has useful implications for the policy makers who can formulate their policies and strategies based on the identification of those areas where their country is leading and where it is lagging. The study also has relevance for the other emerging countries of the world that can follow the same path like BRICS and become the leaders in attracting FDI inflows in future.