Does Corruption Impede Foreign Direct Investment Inflows in India? An Empirical Investigation

The aim of this study is to examine the causal relationship between corruption, political stability and Foreign Direct Investment (FDI) in India. The study is based on annual time series data spanning from 1996 to 2017. In order to find out the exact relationship between the variables, the Johansen cointegration test has been applied. For checking the long-run causality, Vector Error Correction Model (VECM), and for short-run relationship, the Wald test have been utilized. The study also applied the Granger causality test for testing the causal link among the variables. This study also used the Impulse Response Function (IRF) to understand the impact of one standard deviation change in one variable on the other variables. It is found that there is cointegration among the variables. The Granger causality test shows that there is a unidirectional relationship between control of corruption and FDI and there is a bidirectional relationship between political stability and FDI. It can also be seen that the Cholesky response function supports the results of the Granger causality test. The Wald test shows that there is a short-run relationship between the variables. These results can be used in policy formations and helpful for decision makers in devising pro-FDI inflow strategies.