Tech Tides: Analyzing Foreign Investment Flows and Volatility in the Information Technology Sector
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Abstract
India's IT industry is very attractive to foreign investors because of its low operating costs, large pool of highly skilled workers, and supportive business climate created by government regulations. These regulations are designed with investors' demands in mind, with a special focus on subjects like blockchain technology, cybersecurity, hyper-scale computing, and artificial intelligence. India is the market leader in the world of service sourcing in terms of market share. The computer hardware and software industries have attracted the highest inflows of foreign investment, with US$9.39 billion invested in them in FY23. This industry, which employs more than five million people, accounts for 53% of India's service export earnings. It is projected that the IT sector in India will contribute 10% of the country's GDP by 2025. FPIs have a significant impact on the IT sector in a number of ways, with an emphasis on how sector performance influences FPI investment decisions and vice versa while taking into account regional and global market trends, industry-specific regulations, and technological advancements.
This study examines the effects of foreign portfolio investments in the IT industry on sectoral returns and volatility of corresponding sector stock index using weekly time series data spanning an eleven-year historical period from April 2012 to the final day of March 2023. This research indicates that growth in the IT sector will drive more foreign portfolio investment (FPI) flows into the Indian IT industry, as the FPI flows into the Indian IT sector are primarily determined by the performance and returns of the IT sector. Overall, this study demonstrates the complicated relationships and complexity of these financial and economic variables, offering valuable insights into the behavior of financial portfolio investors and how such relationships impact sectoral dynamics and macroeconomic stability.