Determinants of Bank Foreign Direct Investment Inflow in India: A Dynamic Panel Data Approach

Abstract

India received highest foreign direct investment (FDI) in the world during the first half of 2015, leaving bigger economies like the US and China behind. In the process of globalization, India has liberalized all its sectors and invited FDI in most of the sectors, albeit with a sectoral cap. Internationalization of banks is perhaps the best example of India’s globalization. There are 44 foreign banks with 300 branches operating in India having a cap of 74 per cent and 20 per cent foreign investment in private and public sector banks, respectively. The present study aims to determine the motives behind bank FDI inflow into India. To accomplish that, a county-wise panel was constructed and bank FDI data from 2001 to 2013 was analyzed through generalized method of moments, a dynamic panel data model. The result of the study shows that bank FDI follows overall FDI, indicating that foreign banks follow their clients from their home country to serve them in the host country. However, locational advantages offer them profit-making opportunities and thus play a limited role in drawing bank FDI, which contribute to the development of the Indian economy. The argument that bank FDI inflow increases during a period of crisis is not relevant in the Indian context. The study suggests increasing the FDI cap in banking sector to attract more FDI and further relax the current restrictive policy on entry of foreign banks in India.