A Causal Relationship between FDI Inflows and Export: The Case of India

Abstract

Foreign Direct Investment (FDI) is considered as an important means of promoting export of the host countries. By training the local work force and upgrading the technical and managerial skills, it helps in raising the efficiency and productivity of the factors and hence competitive strength in the international market. In addition to this, by facilitating access to large international market, FDI makes a significant positive contribution to the host country’s exports. However this is true if FDI comes for efficiency reason and not for domestic market. The present study examines the nature of relationship between export and FDI in India over the period 1980-2010. Using Johansen co-integration method, the paper finds a stable long run equilibrium relationship between FDI and export growth. The result of Granger causality based on vector error correction model (VECM) shows that causality runs from export to FDI inflow direction and not from FDI inflow to export direction. In the short run, however, neither export Granger cause FDI inflow nor FDI inflow Granger cause export from India.

Key words: Foreign Direct Investment, Export, cointegration, causality.