Abstract
The study seeks to foster fresh empirical evidence on how FDI is relevant to the foreign trade growth in India under a time-varying parameter model with vector autoregressive specification. The Johansen’s cointegration test documents a significant and positive long-run co-movement between FDI and foreign trade in India. The vector error correction model suggests a unidirectional long-run causality from foreign trade to FDI. However, the Granger causality test confirms a bidirectional short-run causal relationship between these variables. Further, the variance decomposition analysis approves strong exogeneity of foreign trade. Again, the impulse response function analysis reveals that the responses generated from a positive shock of foreign trade to FDI and vice versa are small and initially negative and thereafter remain persistently positive at a constant level. The study finally concludes that the absence of long-run causality from FDI to export is the result of much domestic market orientation of foreign investors and less emphasis on the export-oriented sectors in India.
Highlights
The World Development Report (World Bank 1987) outlines a crucial observation, that is, while average annual economic growth rate of the Four Asian Tigers, namely Hong Kong, Singapore, South Korea and Taiwan, adopting export-led growth strategy was at 9.5% during the period of 1963–1973, it was only 4.1% in the countries which followed the import-substitution industrialization (ISI) strategy
It is necessary to determine the unit root property and order of integration for each variable included in the system. Both the unit root tests as proposed by Dickey–Fuller and Phillips–Perron are performed with intercept and time trend and intercept for all variables in their levels, and the tests are performed with their first difference values and so on
From the results presented in the tables, it is clear that the null hypothesis, i.e., the existence of a unit root in its levels cannot be rejected for any of the series since the t-statistics of Augmented Dickey–Fuller (ADF) and PP tests of the variables are less than the critical values at any level of significance, i.e., 1 and 5%
Summary
The World Development Report (World Bank 1987) outlines a crucial observation, that is, while average annual economic growth rate of the Four Asian Tigers, namely Hong Kong, Singapore, South Korea and Taiwan, adopting export-led growth strategy was at 9.5% during the period of 1963–1973, it was only 4.1% in the countries which followed the import-substitution industrialization (ISI) strategy. With the same ISI strategy, India has witnessed an average economic growth of only around 3.5% (famously known as the Hindu growth rate) during the 1950s to 1980s. The country’s policymakers begun to realize the impact of adopting free-market and outwardoriented trade policies considering the remarkable growth attained by the East Asian tigers who became independent concurrently with India. Witnessing the economic success achieved by the East Asian tigers, the neo-classical economists begun to rely
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