FDI, GDP and Regional Disparity

Foreign direct investment (FDI), in the broader sense, is more than mere physical capital because the entry of FDI increases the inflow of foreign exchange along with know­ledge capital, technology, and brand ­equity (Balasubramanyam et al 1996). Contemporary studies reveal that the impact of FDI on the growth of the host country is expected to be manifold (De Mello 1997). It can supplement domestic capital formation and spur industrial progress. Depending on this expectation, India has redesigned its economic policies, liberalised entry barriers, and overhauled administrative machinery for attracting a rising volume of FDI ­inflows into the country. Policymakers feel that the influx of FDI can increase the production base, generate employment, acce­lerate the gross domestic product (GDP) growth, increase the inflow of foreign exchange, and ease the balance of payment (BOP) crisis. If all these expectations prove true, a region receiving the lion’s share of FDI is sure to grow at a faster rate than the other regions not receiving FDI. If an empirical study can substan­tiate this belief, there is no denying the fact that the concentration of FDI inflows can add to economic disparity across the regions and states of the country.

This article has been undertaken to exa­mine if the inflow of FDI augments the economic growth and aggravates the regional imbalance using some simple statistical methods. Indeed, by this time, many researchers have used robust statistical methods, such as time series, co- integration, structural equation modeling, and panel data analysis. These methods have inherent merits. However, this analysis avoids dependence on programmed software. Instead, it points to the visible economic reality, relies on relevant data, and picks up simple statistical methods for drawing valid inferences.