DOMESTIC CAPITAL VS. FOREIGN CAPITAL NEW ENTERPRISE CREATION: THE CASE OF FDI IN INDIA

Abstract

The attempt of this paper is to find an empirical relationship between Foreign Direct Investment
and New Firms (Paid up Capital) and Gross Capital Formation (proxy for business growth) and
Credit to Commercial Sector and Gross Capital Formation using the test of stationarity (ADF, PP,
and KPSS methods), Johansen Cointegration and Granger’s Causality. The results show that FDI
crowds out creation of new firms and capital formation and it is the Credit flow to the commercial sector that causes Gross Capital Formation at current price. It shows domestic flow of credit
is more influential in capital formation rather than foreign capital inflow.