FDI, services trade and economic growth in India: empirical evidence on causal links

Abstract

This article examines the linkages between inward FDI, services trade (export and import) and economic output using co-integration and VECM causality test. These linkages have been explored both at the aggregate and at the sectoral levels (manufacturing and services). The empirical findings confirm the long-run relationship among these variables. Causality results indicate the presence of bi-directional causal relationship between FDI and economic output as well as between services exports and economic output. The results also bring out feedback relationship between services export and FDI, reconfirming the presence of complementary relationship between the two. At the sectoral level, we find at least a unidirectional causality from FDI and services exports to both manufacturing and services output and also cross-sectoral spillover effects from manufacturing output to services output and vice versa.