The Interplay of Foreign Direct Investment in Unravelling the Nexus of Technological Innovation and Economic Dynamics: An Integrated Study Using Vector Error Correction Model
Restricted accessResearch articleFirst published online 2024
The Interplay of Foreign Direct Investment in Unravelling the Nexus of Technological Innovation and Economic Dynamics: An Integrated Study Using Vector Error Correction Model
Most lower-middle income countries prioritise innovation, with foreign direct investment (FDI) as a key funding source for sustainable development. This article studies the interplay between FDI, technological innovation (measured by patent-granted residents), gross domestic product (GDP), research and development (R&D) expenditure (RDE) and inflation of the Indian economy from 2002–2003 to 2022–2023. It uses a vector error correction model, Johansen cointegration tests, Granger causality tests, the impulse response function and variance decomposition. The study finds two cointegration relationships between the variables. GDP and RDE have a significant positive effect on technological innovation in the long term. Neither FDI nor inflation shows such an impact. FDI policies should therefore consider factors such as a conducive regulatory framework, tax breaks and grants for R&D to enhance their impact on innovation.
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