Financial Deepening, Foreign Direct Investment and Economic Growth: Are They Cointegrated

Abstract

The paper explores the long run equilibrium nexus between financial deepening, foreign direct investment (FDI) and economic growth in India during 1970-2007. Using Johansen’s cointegration technique, the paper finds that financial deepening; foreign direct investment and economic growth are cointegrated, indicating the continuation of long run equilibrium relationship between them. The Error Correction Model (ECM) further confirms the presence of bidirectional causality between foreign direct investment and economic growth and a unidirectional causality from financial deepening to foreign direct investment. The paper at the end suggests that India needs well developed financial system in order to bring more foreign direct investment and economic growth in the Indian economy.