Long Run Causal Nexus between Foreign Direct Investment and Foreign Trade in India

This paper employs cointegration technique and error correction model to examine the long run causal nexus between foreign direct investment and foreign trade (imports and exports) in India. The databases are on monthly basis and it covers the period from July 1992 to October 2003. By and large, the analysis reveals that there is a one-way causal linkage from import to foreign direct investment and it is consistent with the traditional step-by-step sequences of servicing foreign markets, and that there is also a unidirectional causality from export to foreign direct investment and it may be due to the outward-oriented export-led development policy that attracts foreign direct investment inflow in India in the short run.