Infla-trade Effect on Inflow of Foreign Capital

Abstract

FDI assumes a great significance in both developed and developing countries because of its immense potential to address the gap between the desired investment and the required savings. Along with this, its role in channelising the inflow of technology and technical know-how, managerial and organisational capabilities etc. is undisputed. So there has been a competition among the countries to create the appropriate environment so as to attract more FDI into their economies. This requires identifying the factors which attracts FDI inflow into the country like adequate infrastructure, governance policies, exchange rate, convertibility criteria, inflation, volume of trade etc. This paper analyses the role of Market size, inflation and trade openness in accelerating the inflow of FDI into the country along with analysing the combined inflation effect and trade openness effect in channelising the inflow of this vital form of foreign capital. Market size and inflation were found not to be significant in influencing the inflow of FDI into the country. Volume of trade and Trade openness was found to be highly significant at 5%.Also 'infla-trade', was found to be significantly influencing FDI inflow. The market size and volume of trade has positive effect while the FDI is negatively affected by inflation and the combined effect of inflation and volume of trade i.e., 'infla-trade'. Again while the marginal effect of inflation is found to be stable in the pre-reform period and increasing after reform, marginal effect of the volume of trade shows wide fluctuations.