In this era of globalization, the FDI flows faster than ever into the developing countries, particularly the fastest growing ones. FDI acts as a major stimuli to economic growth in developing countries by creation of wealth and employment in the host country and improvement in the balance of payments via exports. This paper examines empirically, on the basis of an inter-industry analysis, the time effects of the variables influencing the FDI inflows to India during the post-reforms period with special reference to temporal variations in the effects of these determinants using time dummies for both intercept and elasticity. The present study finds that at the initial factor-driven stage of the development, resource-seeking FDI was strongly influenced by such determinants as marketing-intensity, gross fixed assets and to some extent by export-import ratio. However, the elasticity or the response of FDI to these stimuli started declining as early as in 1997. The situation started improving by 2000. It remains to be seen if this improvement has become stable.

Amongst the developing and transition economies of both Europe and Asia, the fastest growing ones are the biggest recipients of Foreign Direct Investment (FDI) (UNCTAD, 2002). The developing countries are now shifting their priorities from import substitution towards structural adjustments via free market economies and an increasing emphasis on FDI. The latter is now accepted as panacea for all types of scarcities—financial capital, technological know-how, efficient managerial techniques, organizational skill and access to market abroad. As against portfolio investment, FDI is a source of creation of tangible and intangible assets (Moran, 1998; Nagraj, 2003), employment and wealth in the host economy. It may provide rents, potential spillovers and externalities that are highly beneficial to the host country’s economic growth (Moran, 1998). The globalization of activities by Multinational Enterprises (MNE), together with the efforts made by all kinds of governments, has enhanced the importance of FDI, not only as a development factor by itself, but also for its close linkages with trade, technology transfer and financial flows (UNCTC, 1991).