Page 1 of 5

Journal for Studies in Management and Planning

Available at http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 03 Issue 10

September 2017

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 389

Foreign Direct Investment in Service

Sector in India- A Study

MALLELA JANGAIAH

Department Of Management, Jntu Hyderabad

Abstract:

FDI is a tool for economic growth through its strengthening of domestic capital, productivity

and employment. FDI also plays a vital role in the up gradation of technology, skills and

managerial capabilities in various sectors of the economy. The paper investigates objective of

this paper is to examine the Foreign Direct Investment (FDI) inflows in India and especially in

service sector. In this research attempts the FDI and its impact in GDP, mainly we have seen

the relationship between the GDP with FDI flows. This analysis has revealed that Foreign

Direct Investment has positive and significant impact on GDP We understand the FDI Inflows in

service Sector is showing the consecutive growth trend to getting FDI inflows.

Introduction

FDI have helped India to attain a financial

stability and economic growth with the help

of investments in different sectors. FDI has

boosted the economic life of India and on

the other hand there are critics who have

blamed the government for ousting the

domestic inflows. After liberalization of

Trade policies in India, there has been a

positive GDP growth rate in Indian

economy. Foreign direct investments helps

in developing the economy by generating

employment to the unemployed, Generating

revenues in the form of tax and incomes,

Financial stability to the government,

development of infrastructure, backward and

forward linkages to the domestic firms for

the requirements of raw materials, tools,

business infrastructure, and act as support

for financial system. Forward and back ward

linkages are developed to support the

foreign firm with supply of raw and other

requirements. It helps in generation of

employment and also helps poverty

eradication. There are many businesses or

individuals who would earn their lively hood

through the foreign investments. There are

legal and financial consultants who also

guide in the early stage of establishment of

firm.

FDI and India Service sector

The sector wise shift of FDI in last two

decade have shown a dramatically change.

For comparison, this study divide the period

from August 1991 to March 2009 into two

decade first from 1991 to 2000 and second

2000 to 2009. During the first decade of

reforms started from August 1991 to

December 1999, services sector on Indian

economy was unable ton attracted the

attentions of foreign investor and old third

place after the transportation and electrical

equipment, but second decade started from

January 2000 to March 2009,the emergence

of the service sector have change the

composition of foreign direct investment in

India. In the second decade of economic

reforms this sector account 27 percent of

total FDI and hold first rank in attractive

sector for foreign investor. This is due to the

growth of sub sectors like IT, Financial

Services, Insurance sector extra. There is a

new wave in the growth of India financial

sector after liberalization insurance industry

growing with rapid rate. The number of

Page 2 of 5

Journal for Studies in Management and Planning

Available at http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 03 Issue 10

September 2017

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 390

merger and acquisition in the insurance

industry as well as in banking sector also,

number of private banks are growing in

India. The performance of foreign banks is

quit well. Government of India planning for

issue some new license for privatization of

Indian banking sector and it is assumed the

sector will continue with sector growth.

Role of FDI in India’s Service Sector

The Service Sector has played a dominant

role in the Indian Economy with a 57.3 per

cent share in the GDP and a growth of 10.1

per cent in 2009 -10 (Economic Survey

2010-2011, RBI). Foreign Direct

Investment (FDI) has been instrumental

behind the growth of service sector in

India. Since the opening up of the economy

in 1991, FDI in India has grown in leaps and

bound. From a mere 45.46 million dollars in

1970, FDI has grown into a mammoth

40418.39 million dollars in 2008. The FDI

inflow between 1991 and 2008 had

increased by a staggering 53791.2 million

dollars. A substantial part of the FDI has

gone into the service sector. In addition,

FDI’s contribution to this sector has only

grown overtime. The flow of FDI in Indian

service sector has boosted the growth of

Indian economy; this sector has

contributed a large share in the growth of

India’s GDP. The service sector has

attracted a significant portion of total FDI in

Indian economy which is visible especially

in the second decade (2000 - 2011) of

economic reforms in India.

The economic role of FDI is increasingly

becoming significant in the Indian economy

with the transition of FDI policy from a

restrictive phase of seventies and early

eighties to a relatively liberal phase of

nineties. FDI is an important indicator of

economic growth and stimulator of

competitiveness. Foreign Direct Investment

has been seen as a dominant determinant to

achieve high rate of economic growth

because it brings in scarce capital resource,

raise technological capability and increase

efficiency through enhancing domestic

competition. After liberalization, FDI

inwards flows in India have increased

tremendously.

Review on FDI in service Sector

Rashmi Banga (2005) identifies and

discusses critical issues with respect to

growth of India’s service sector. An

assessment of performance of services at the

aggregated as well as the disaggregated level

is undertaken in terms of their shares in

GDP, employment, trade and FDI. Santi

Chaisrisawatsuk and Wisit

Chaisrisawatsuk’s study explored how

international trade and investment flows

affected each other, using data from OECD

and six ASEAN countries, and examined

whether trade and investment linkages were

different between developed and developing

economies, or between countries that

participate actively in bilateral or regional

trade agreements. Laura Alfaro’s (April

2003) study shows that the benefits of FDI

vary greatly across sectors by examining the

effect of foreign direct investment on growth

in the primary, manufacturing, and service

sectors. An empirical analysis using

crosscountry data for the period 1981-1999

suggests that total FDI exerts an ambiguous

effect on growth. Foreign direct

investments in the primary sector, however,

tend to have a negative effect on growth,

while investment in manufacturing a

positive one. Evidence from the service

sector is ambiguous.

The paper examines co-integration and the

causal relationship between Foreign Direct

Investment (FDI) and the economic output

or Gross Domestic Product (GDP) in the

both short and long run of Bangladesh,

Pakistan and India over the period of 1972-

2008. Three econometric models, viz.

Augmented Dickey-Fuller (ADF) test,

Page 3 of 5

Journal for Studies in Management and Planning

Available at http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 03 Issue 10

September 2017

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 391

Engle-Granger two-step co-integration test,

Vector error correction mechanism (VECM)

have been used. This study also used

Granger Causality (GC) to find the

directional relationship between FDI and

GDP. The results suggest that there is no co- integration between FDI and GDP in the

both long and short run in Bangladesh and

India. However, we find the co-integration

between them in the both short and long run

in Pakistan. Conversely, GC results suggest

that there is no causality relationship

between GDP and FDI for Bangladesh and

one way or unidirectional relationship found

for Pakistan and India, which means FDI

caused economic output in Pakistan.

The paper tries to fill up the gap in the

literature explaining Foreign Direct

Investment (FDI) flows in developing

countries by emphasising the role or quality

of institutions, often unaddressed in current

empiricism, yet of paramount importance.

Control of corruption, better rule of law,

political stability and better freedom of

expression of the media are used as

indicators of good governance and

institutional quality in this research

endeavour. The analysis of a selection of 45

developing countries in the African, Latin

American and Asian regions is undertaken

in our empirical analysis. After having

controlled for the usual variables and

performed a battery of robustness tests,

under multiple scenarios, the findings

primarily prompt us to conclude that the

quality of some institutions in the host

country has an enormous impact on inward

FDI. Furthermore, as the different

institutional indicators are complementary to

each other, their combined effect is found to

reinforce the level of FDI inflows to the host

country.

We assess the location choices of 6020

foreign investors at the level of Indian

districts. Employing conditional logit

models, we find that clustering of Foreign

Direct Investment (FDI) is driven strongly

by herding among investors from both, the

same and other countries of origin.

However, the behaviour of Nonresident

Indians (NRIs) and German investors is

strikingly different.

Conclusion

The Government of India was initially very

apprehensive of the introduction of the

Foreign Direct Investment in the Retail

Sector in India. The unorganized retail

sector as has been mentioned earlier

occupies 98% of the retail sector and the rest

2% is contributed by the organized sector.

Hence one reason why the government

feared the surge of the Foreign Direct

Investments in India was the displacement

of labour. The unorganized retail sector

contributes about 14% to the GDP and

absorbs about 7% of our labour force. Hence

the issue of displacement of labour

consequent to FDI is of primal importance.

There are different viewpoints on the impact

of FDI in the retail sector in India,

According to one viewpoint, the US

evidence is empirical proof to the fact that

FDI in the retail sector does not lead to any

collapse in the existing employment

opportunities. There are divergent views as

well. According to the UK Competition

Commission, there was mass scale job loss

with entry of the hypermarkets brought

about by FDI in the UK retail market. This

paper highlight is Introduction & Definition

of Retail, Division of Retail Industry, FDI

Policy in India, FDI Policy with Regard to

Retailing in India, Foreign Investor’s

Concern Regarding FDI in Single and Multi

Brand Retail.

We introduce the 2×3×3 knowledge-capital

model, recently proposed by Baltagi et al.

(2007) and Uttama and Péridy (2009). The

theoretical implications are suggested, not

only how IIT is determined by country