Technological Innovation and Regulation as Determinants of Business Growth: An Institutional FDI Fitness Theoretical Framework

Introduction

Innovations in technology has profoundly influenced the worldwide economy and its implications can be seen in changing world market, better standard of living and better trade opportunities. Technology has raised expectations for everyday comforts and is leading in progressively vigorous global change. Advances in technological innovations have essentially improved business activities and helped cutting down the cost of production of many operations. The progress of software business, along with media communications, have expanded employment opportunities and also reinforced financial development of a country. Regulations are the monitoring checks put on businesses by governments and other regulator institutions, which impact various decisions of firms like estimating price, generation of employment, entry and exit decision. As per the OECD, regulation is the most unavoidable type of government intervention in economy, yet OECD believes that an effective regulation policy is a basic requirement for the working of a market economy. It has been noted that intra-industry trade increases with the liberalization of trade, particularly tariff rate reductions (Goldar and Banga, 2007), making an argument that India, being an emerging economy, will see high growth due to technological innovations and regulatory reforms.

The expansive increase in the Foreign Direct Investments (FDI) in India is one of the after-effects of technology and the easing of regulatory reforms that played an important role to boost the business. In any economy investment is essential for any business to sustain. In India, foreign investment plays a major role in upliftment of the economy and this paper considers FDI as a factor responsible to boost the growth of businesses in India.

Most of the emerging countries show a positive outlook towards FDI. India changed its policy framework considerably in 1991, moving from a restrictive policy to a more liberalised one, in the process leading to huge increase in the FDI inflows, from a mere USD 0.325 billion in 1991, to a whopping USD 42.1 billion in 1998, a humongous increase in a matter of just 7 years. The liberalisation also changed the type of industrial sectors which saw FDI inflows, sources and entry modes of FDI, reaching an all-time high of 8.579 USD billion in 2018. After liberalisation, India’s Gross Domestic Product (GDP), increased manifold from USD of 462.17 billion in 2001 to USD 2597.491 billion in 2017.

Studies analysing the effect of foreign inflows on economic efficiency and growth of countries show inconclusive evidence, with both positive (Strout and Chennery, 1996) and Mathiyazhagan, 2005) and unfavourable impact (Singer, 1950; Griffen, 1970; and Weisskof, 1972).

The fundamental framework behind the promotion of FDI lies in the way that these nations are inadequate in savings and investments which brings down overall economic growth. So to overcome any issues between investment need of a nation and its savings, FDI is considered as an imperative aid (Moran, 1999). In India, at the time of independence in 1947, focus was more on self-efficiency rather than foreign investment. Though later on, limited accessibility of finance changed the perspective towards FDI (Kumar, 1996). From then the discussion over the need of FDI began and later in 1980s, Government of India went for deregulation of industries, which initiated the liberalisation process, and was a precursor to the economic liberalisation in 1991. Hence this study examines the role of technological innovations and regulations in improving FDI, which is one of the variables which contributes in the growth of a nation.