FDI Inflows Influence Merchandise Exports? Causality Analysis for India over 1991-2016

Abstract

The deepening waves of globalization since late eighties and the growth in the international integrated production networks (IPN) over the past decade have significantly increased both Foreign Direct Investment (FDI) and merchandise trade flows. India, whose share in global FDI inward stock and global merchandise exports have increased from 0.08 percent to 1.13 percent and 0.51 percent to 1.60 percent over 1989–2015 respectively, is no exception to this trend. The current paper attempts to explain the influence of FDI inflows on India’s exports through a time series analysis with quarterly data over the period 1990–91 (Q1) to 2015–16 (Q4) in the presence of multiple structural breaks. The empirical analysis indicates that while exports influence FDI inflows, the reverse is not true in the Indian context. The result underlines the fact that FDI inflows in the country may primarily be targeting the growing domestic sectors, rather than utilizing the domestic resources for reaching the world market.