Impact of Foreign Direct Investment on Domestic Exports: Time Series and Panel Evidence from South Asia

Abstract

In Chaps. 7 and 8, we assessed the impact of FDI inflows on growth and domestic investment, and results indicate that FDI has a positive impact on both growth and domestic investment. In this chapter, we examine the impact of FDI inflows on exports for South Asian countries using export demand and supply function. For comparative purpose, the role of FDI in promoting China’s exports is also examined. The results indicate that FDI promotes exports in India, Pakistan, Sri Lanka, and Bangladesh. On the other hand, FDI does not promote exports in Nepal. Panel data analysis also shows that the impact of FDI on export supply in South Asia is positive and statistically significant. In the case of China, we find significant impact of FDI on China exports, and the positive is higher compared to South Asian countries. Causality test performed using both time series and panel methodology indicates that for India, Pakistan, Sri Lanka, and Bangladesh FDI leads to increased export, which is one way and causality is not found in other direction. For Nepal, there is no causality in either direction. Similar result is also found for manufacturing exports for South Asian countries. The analysis highlights the fact that by emulating the policies followed by China and Singapore and with the right mix of domestic policies for FDI by South Asian countries, particularly, India can substantially enhance its export competitiveness in the international market and total exports.