THE ROLE OF FOREIGN DIRECT INVESTMENT IN INDIA'S SERVICES EXPORTS: AN EMPIRICAL INVESTIGATION

Abstract

Export-oriented FDI is increasingly being perceived as an instrumental tool to strengthen country's export-competitiveness in developing countries. The theoretical literature suggests that both FDI and trade can be substitutive or complementary to each other depending on the nature of investment, industry-mix and host country's characteristics. In this context, the experience of the Indian economy is particularly instructive. Although some empirical studies have supported the view that FDI inflows in the Indian economy have not been export-oriented, it is important to note that none of these have studied the impact of FDI inflows on service exports, in spite of service sector emerging as a key driver of India's export growth. This paper examines the causal relationship between FDI inflows and service exports in the Indian economy during the post liberalization period since 1991. It uses a multivariate VAR framework for the analysis. The empirical results confirm the presence of short-run unidirectional Granger causality from FDI to services exports in the Indian economy.