FDI and FII as Drivers of Growth for Indian Economy: A Comparison

Abstract

Investment plays an important role in accelerating economic growth of any economy. Indian economy opened up to the global world in 1991 by allowing foreign investors to make investments in India. The foreign investments can be made either in the listed companies through financial markets (called Foreign Institutional Investors) or by directly investing capital in the listed/unlisted companies in India (called Foreign Direct Investment). Foreign investment complements the domestic investments by increasing economic activities and capital formation, thus bringing with it new technology advance, making the domestic market more competitive. Foreign institutional Investors (FIIs) only aid the domestic investment by increasing capital inflows through the secondary markets and are very volatile. Foreign Direct Investment (FDI) plays more important role than FIIS in progress of any developing country especially like India. India has been projected as the second most important FDI destination after China for transnational corporations during 2010-12. FDI provides not only inflow of foreign funds and investments but also transfer of advanced technology and skills, thus creating job opportunities. Although both types of foreign investments provide an impetus for economic and industrial expansion, however India should focus more on attracting FDI as it stays for longer period, for its exist policy is not as easy as for FIIs. Availability of highly qualified human resource, huge untapped potential domestic markets, low-cost manufacturing, makes India a favorable destination for foreign investors. The present paper tries to do a comparative analysis of FDI and FII and their contribution towards economic growth. For the data and methodology, the time series analysis is applied on the time period from 2000 to 2012.