India Fdi

India has quickly become an attractive place for foreign direct investment (FDI). In A. T. Kearny's 2005 FDI Confidence Index (Kearny, 2005), India rose to become the second most attractive country for FDI. This was a rapid improvement from the #15 ranking they earned in 2002. India is recognized as the leader in FDI for business processing and information technology services.

India was restrictive towards FDI in the four decades leading up to the early 1990s. (Pradhan, 2010) In 1980, India had an FDI inflow of about $79 million. India FDI inflow remained low for the next decade. India had an FDI inflow of about $97 million in 1990. Kearney noted that corruption, poor infrastructure, the slow pace of economic reforms, bureaucracy, and the government's economic role caused these low FDI flows. (Kearny, 2001)

India initiated economic reforms in the early 1990s to actively work on liberalization and globalization. (Kanda et al., 2001). These reforms included the devaluation of rupee, making import licenses drastically easier to obtain, removal of quantitative restrictions, reduction in tariffs and protection rates, limitation of export subsidies, and easing restrictions on FDI. Automatic clearance of FDI was granted to certain sectors including banking, insurance, mining, telecommunications, construction, port management, harbors, roads and highways, and airports. Since these economic reforms were put in place, FDI inflows have begun to grow exponentially. FDI inflows increased from $155 million in 1991 to $3613 million in 1997. After a few years of stagnant growth, FDI quickly rose to $41,554 million in 2008. Figure 3 below shows this trend.

India is an attractive country for FDI for several reasons. India has an attractive market size and growth, which is one of the most influential determinants of FDI location for horizontal seeking FDI. It also offers a cheap labor force, which is important for vertical seeking FDI. It appears that the most important determinant of FDI inflows in India is its culture and language. The strong English