A Gravity Model Analysis of IFDI - Exports Nexus: A Case Study of Indian Exports

Abstract

The impact of Inward Foreign Direct Investment’s influence on a country’s exports to the FDI source is a subject matter of significance. This paper applies an augmented gravity model of international trade with Foreign Direct Investment integrated into it to empirically estimate the factors that influence India’s exports to its top ten FDI source countries. The top ten investor countries account for about 87 percent of the total FDI inflows into India and 40 percent of Indian exports in 2018. This paper attempts to examine whether the Inward Foreign Direct Investment flows from these nations influence the exports to these nations from India. To this end, IFDI stocks that the top ten investing countries hold in India and the exchange rate between Indian Rupee and their currencies are embedded into the augmented gravity model for international trade. Findings indicate that IFDI stocks have a highly significant and positive role to play in India’s exports to the ten FDI source countries. Besides, the economic size of the investor nation, geographical distance, and geographical distance are significant determinants of the export volume as expected. However, the limited period of data used in the panel data regression may have affected the results. The findings may change if this element is altered. Further study, with a longer period, should be conducted to test the IFDI - Exports Nexus confirmed in this paper. In general, the government of India should continue improving the investment policies as well as undertake further export-oriented reforms in the economy to push India’s exports.