Abstract

India has implemented far-reaching economic reforms since it adopted a market-oriented open door policy in 1991. The current paper examines how changes in the macroeconomic condition have influenced inward FDI in India. The empirical evidence derived through vector error correction estimations show all three macroeconomic variables-national income, wage, and tariff rates-form a statistically significant and stable long-run equilibrium relationship with FDI inflows. FDI inflows are revealed to be positively related to market size. In contrast, wage levels and tariff rates have negative effects on FDI inflows, implying that less protection stimulates more FDI in India. Finally, albeit the existence of structural break in the model between 1992 and 1993, the influence of economic reform on FDI inducement was not statistically significant.