Relationship Between FDI and India’s Foreign Trade: A Cointegration and VECM Approach

Abstract

Foreign capital inflows have emerged as a powerful tool for transferring capital and technology from other economies, especially developed countries. Globalization has made way for international business to cross borders. Foreign Institutional Investor and Foreign Direct Investment (FDI) are two modes of foreign investment and FDI is one of the best routes to invest across the border. India has also become an attractive destination for investment due to immense growth potential. The whole world has seen the role of foreign investment in acting as a bridge to link the gap between investment and savings. It helps in maintaining transparency among different countries and promotes bilateral trade between the countries. This paper focuses on analyzing the trend of FDIs and exports along with the relationship between exports and FDI with the help of Johansen Cointegration and Vector error correction model (VECM)