Foreign Direct Investment and the Macroeconomics

Abstract

Considering the two components of capital inflow namely Foreign Direct Investment (FDI)

and Foreign Portfolio Investment (FPI), it can be argued that FDI directly contributes to

investment and FPI supports domestic investors by supplying them with liquidity. FDI is an

investment made by a firm or individual in one country into business interests located in

another country where as FPI is related to holding of stocks or bonds and reaping of the profits by the Foreign Institutional Investors (FII). This paper aims to study the impact of capital

inflow (FDI) on crucial macroeconomic indicators of the host country. Of our interest are the

real GDP, exchange rate and employment. Also, special importance is given to today’s growing concern, sustainable development (as an indicator, emission of CO2 is used). We have undertaken an econometric analysis of the Indian economy to find empirical relations among the factors and it has been seen that there exists a strong relation between the FDI and the overall growth of country including employment and sustainable development.


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