Do FDI Inflows influence Merchandise Exports? Causality Analysis on India over 1991-2016

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 is no exception to this trend, 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. 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). 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 sector, rather than utilizing the domestic resources for reaching the world market. It also suggests that there exist further scope for better utilization of the India-centric trade and investment agreements.