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Journal of Business Management & Social Sciences Research (JBM&SSR)

ISSN No: 2319-5614

Volume 2, No.11, November 2013

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Impact of FDI on Services Export: Evidence from India

N. J._________________________________________________________________________________
Saleena, Associate Professor of Economics, Nirmalagiri college, Kerala, India

Abstract
Trade in services has grown more rapidly than merchandise trade. Information technology and business process
outsourcing are among the fastest growing sectors in terms of services export.FDI is widely viewed as being one of the
principal vehicles for the international transfer of technology. FDI results in increase in productive capital stock,
technological growth, and facilitates transfer of managerial skills, besides improving global market access.This paper is
examines empirically the role of FDI on services export using econometric tools

Introduction
Service sector has emerged as the largest and fastestgrowing sector in the global economy in the last two
decades, providing more than 60 per cent of global
output and, in many countries, an even larger share of
employment. The rising share of services in world
transactions has also accompanied the growth in
services. Testimony to the rise in international supply of
services is the fact that trade in services has grown as
fast as trade in goods in the period (1991-2011). Along
with this, worldwide there has been a marked shift of
FDI away from manufacturing sector towards service
sector. The share of services in total FDI stock has now
increased to around 60% since 2000 as compared to less
than half in 1990 and only one quarter in 1970s. In line
with the global trend, service sector in India has also
grown rapidly in the last decade. Its growth has in fact
been higher than the growth in agriculture and
manufacturing sector. It now contributes around 51 per
cent of GDP. In the trade mode, services trade has also
grown at the same rate as goods trade over the 1990s
(i.e., about 6.5 per cent) and its share in total trade has
reached around 24 per cent.
Indias growth rate has been remarkable after the
liberalization and Economic Reform in 1991. The
Service Sector in India has played a central role in this
growth story. Indian service sector has experienced
unprecedented growth during the last two decades.
Service-led growth is a common phenomenon in the
theory of economic growth (Clark, 1940; Kuznets, 1957;
Chenery, 1960). But traditionally, the service-led growth
has been associated with the tertiary phase of growth,
where a major part of the demand for service comes
from the developed manufacturing sector (the secondary
sector). But Indian growth has been an altogether
different story. The growth of Indian service sector is
largely independent of the manufacturing sector.
India, in its process of growth has been able to bypass
the stage of manufacturing-sector led growth and
reached straight into the third stage service led
growth. This pattern of Indian growth is distinctly
dissimilar from the growth pattern of its Asian peers
namely Vietnam, Indonesia, China, Thailand, Malaysia

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and Korea. While for these Asian countries, export


oriented manufacturing sector has been instrumental in
the growth, in India, the dominant services sector, led
by information technologies and information technology
enabled services has grown faster than all other countries
in the last three decades (Walters, Stapleton and
Andrews, 2007). This fast-growing sector has always
been crucial in Indian economic growth.
Trade in services has grown more rapidly than
merchandise trade. Information technology and business
process outsourcing are among the fastest growing
sectors in terms of services export. FDI is widely
viewed as being one of the principal vehicles for the
international transfer of technology. FDI results in
increase in productive capital stock, technological
growth, and facilitates transfer of managerial skills,
besides improving global market access. The significant
impact of these flows on export expansion has generated
a keen interest in exploring the linkages between FDI
and exports. In spite of the wide-ranging FDI-services
and extensive trade-and services linkages, there is
relatively little empirical work examining the impact of
FDI on services export. On the other hand, the impact of
FDI on commodity export have been studied and
documented extensively. So, an attempt is made to study
the impact of FDI inflows on services export during the
post liberalization period.

Role of FDI in Indias Service Sector


The Service Sector has played a dominant role in the
Indian Economy with a 57.3 per cent share in the GDP
and a growth of 10.1 per cent in 2009 -10 (Economic
Survey 2010-2011, RBI). Foreign Direct Investment
(FDI) has been instrumental behind the growth of service
sector in India. Since the opening up of the economy in
1991, FDI in India has grown in leaps and bound. From
a mere 45.46 million dollars in 1970, FDI has grown into
a mammoth 40418.39 million dollars in 2008. The FDI
inflow between 1991 and 2008 had increased by a
staggering 53791.2 million dollars. A substantial part of
the FDI has gone into the service sector. In addition,
FDIs contribution to this sector has only grown
overtime. The flow of FDI in Indian service sector has
boosted the growth of Indian economy; this sector has

Blue Ocean Research Journals

34

Journal of Business Management & Social Sciences Research (JBM&SSR)

ISSN No: 2319-5614

Volume 2, No.11, November 2013

contributed a large share in the growth of Indias GDP.


Kishor Sharma (July 2000) attempts to investigate the
The---service sector has attracted a significant portion of
role of FDI in India's export performance. Using annual
total FDI in Indian economy which is visible especially
data for 1970-98 he investigates the issue in a
_________________________________________________________________________________
in the
second decade (2000 - 2011) of economic reforms
simultaneous equation framework.Results suggest that
demand for Indian exports increases when its export
in India.
prices fall in relation to world prices. Foreign Direct
The economic role of FDI is increasingly becoming
Investment appears to have statistically no significant
significant in the Indian economy with the transition of
impact on India's export performance although the
FDI policy from a restrictive phase of seventies and
coefficient of FDI variable has a positive sign. Ranjan
early eighties to a relatively liberal phase of nineties.
Kumar Dash & Chandan Sharma (2011) studied the
FDI is an important indicator of economic growth and
relationship among Foreign Direct Investment (FDI),
stimulator of competitiveness.
Foreign Direct
Trade, and Economic Growth, and empirically examined
Investment has been seen as a dominant determinant to
the linkage between these variables. Their review of the
achieve high rate of economic growth because it brings
literature indicated that despite a large volume of
in scarce capital resource, raise technological capability
literature on the relationship among these variables, the
and increase efficiency through enhancing domestic
direction of causality among them was far from over.
competition. After liberalization, FDI inwards flows in
The evidence showed that there was bidirectional
India have increased tremendously.
causality (two-way feedback) between FDI and
economic growth. At the same time, there was also a
Review of Literature
unidirectional causality existing between exports and
FDI is a tool for economic growth through its
FDI. Results of the test of causality between FDI and
strengthening of domestic capital, productivity and
imports indicated the presence of a two-way feedback
employment. FDI also plays a vital role in the up
relationship between the variables. S. Harish Babu
gradation of technology, skills and managerial
(2011) investigated
the impact of foreign direct
capabilities in various sectors of the economy. Dr.
investment and policies on economic development of
Arjun Singh Sirari and Mr. Narendra Singh Bohra
various sectors of the economy by considering factors
(2011) studied the significance of FDI Inflows in Indian
affecting FDI, and included comparative analysis with
Service Sector since 1991 and relating the growth of
the help of statistics relating to sectors attracting highest
Service Sector FDI in generation of employment in
FDI equity inflows for the financial years 2008-09 to
terms of skilled and unskilled. Through their analysis it
2010-11. Koi Nyen Wong, Tuck Cheong Tangand
is observed that at the sectoral level of the Indian
Dietrich K. Faustens (September 2009) paper examines
Economy, FDI has helped to raise the output,
the causal linkages between inward FDI and the
productivity and employment in some sectors especially
countrys engagement in services trade in bi-variate and
in service sector. Indian service sector is generating the
tri-variate VAR frameworks. The empirical findings for
proper employment options for skilled worker with high
Singapore show evidence of bi-directional causality
perks.
between inward FDI and the total trade volume in
services (i.e. the absolute sum of payments and receipts)
Vinod Kumar Sharma (2011) analyses the significance
as well as between FDI and services imports (in the triof FDI Inflows in various Indian sectors from 2005variate specification). This might reflect her relative
2010. The Sector-wise analysis of FDI Inflow in India
open foreign investment policy and free trade regime in
reveals that maximum FDI has taken place in the
services. For Malaysia, the evidence of causality is
Service
Sector including the telecommunication,
weaker and unidirectional, from inward FDI to services
information technology, travel and many others.
imports. These findings were consistent with the
Mousumi Bhattacharya and Jita Bhattacharyya (2009)
different stages of economic development and openness
have studied the link between FDI inflows and services
attained by the two sample countries, and they provide
export of India in the post-liberalization period 1990 useful background for trade and foreign investment
91 Q1 to 2007-08 Q4. The -term relationships among the
policies and development strategies.
two variables were analyzed using the Johansen and
Juselius multivariate cointegration approach. Short and
Rashmi Banga (2005) identifies and discusses critical
long run dynamics were captured through vector error
issues with respect to growth of Indias service sector.
correction models.
A unidirectional causality is
An assessment of performance of services at the
observed from FDI inflows to services export.
aggregated as well as the disaggregated level is
Regression Analysis was also done for the time period
undertaken in terms of their shares in GDP, employment,
1991 to 2008, which revealed that FDI inflows in the
trade and FDI. Santi Chaisrisawatsuk and Wisit
services sector, consultancy services, transport services
Chaisrisawatsuks study explored how international
influences services export.
trade and investment flows affected each other, using

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Blue Ocean Research Journals

35

Journal of Business Management & Social Sciences Research (JBM&SSR)

ISSN No: 2319-5614

Volume 2, No.11, November 2013

data from OECD and six ASEAN countries, and


Stats and various other articles and journals etc. To
examined
whether trade and investment linkages were
analyse the objective 1, statistical tools such as charts
---different between developed and developing economies,
and tables are used. The second objective is analysed by
_________________________________________________________________________________
or between
countries that participate actively in bilateral
using econometric models such as the Augmented
or regional trade agreements. Laura Alfaros (April
Dickey-Fuller (ADF) Test, the Ordinary Least Square
2003) study shows that the benefits of FDI vary greatly
(OLS) Method and Granger Casualty Test. In statistics
across sectors by examining the effect of foreign direct
and econometrics, an Augmented Dickey-Fuller test
investment on growth in the primary, manufacturing, and
(ADF) is a test for a unit root in a time series sample. It
service sectors. An empirical analysis using crossis an augmented Dickey -Fuller Test for a larger and
country data for the period 1981-1999 suggests that
more complicated set of time series models. The
total FDI exerts an ambiguous effect on growth. Foreign
augmented Dickey-Fuller (ADF) statistic, used in the
direct investments in the primary sector, however, tend
test, is a negative number. The more negative it is, the
to have a negative effect on growth, while investment in
stronger the rejection of the hypothesis that there is a
manufacturing a positive one. Evidence from the service
unit roots at some level of confidence.
sector is ambiguous.

Empirical results
Data and Methodology
The study is based on secondary data. Time series data
is used in this study .To study the Inflow of FDI in
Service Sector data has been collected from RBI Bulletin
and various other articles and journals. And to study the
impact of FDI on Services Export, time series data
have been taken from various sources like RBI
Database, Ministry of Commerce and Industry, India

The tables below presents the results of unit root tests


on the natural logarithms of the levels and the first
differences of the variables. On the basis of Augmented
Dickey-Fuller statistics, the null hypothesis of a unit
root cannot be rejected at 5 percent level of significance.
Stationarity is obtained by running the ADF test on the
first difference of the variables.

Null Hypothesis: FDI has a unit root


t-Statistic
Augmented Dickey-Fuller test statistic

-4.25977

Prob
0.0048

Test critical values:


-3.88675

1% level
5% level
10% level

-3.05217
-2.66659
t-Statistic

Prob

Null Hypothesis: SEREXP has a unit root


Augmented Dickey-Fuller test statistic

-3.230669

0.0358

Test critical values:


1% level
5% level
10% level

Granger Causality
The Granger Causality test shows the cause and effect
relationship between the two variables. Granger
Causality type analysis permits us to conclude that the
relationship between FDI and Service Export variables is
found to be significant; FDI has positively influenced
the growth of services export in the Indian economy,
after the liberalization period. The null hypothesis that
FDI does not Granger cause Services Export is tested

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-3.886751
-3.052169
-2.666593
using the logarithmic value of both the variables, in their
first difference form. It can be seen that FDI does not
Granger Cause Services Export at 0.00319 probability.
Here it is also seen that there is presence of
unidirectional causality from FDI inflows to services
export and there is no causality running from services
export to FDI inflows

Blue Ocean Research Journals

36

Journal of Business Management & Social Sciences Research (JBM&SSR)

ISSN No: 2319-5614

Volume 2, No.11, November 2013

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Null Hypothesis
FDI does not Granger Cause SEREXP

Obs

F-Statistic
18

9.23632

Probability
0.00319

_________________________________________________________________________________
SEREXP does not Granger Cause FDI
0.25906
0.77567
Looking at all the data collected, with the help of
published sources, such as articles, books, journals etc.
and after examining the impact of FDI on services export
by using various econometric tools like ADF test, OLS
model and Granger Causality test, it is evident that FDI
has a positive impact on the services export. In other
words, FDI influences the growth of the service export.
Therefore we reject the null hypothesis, that is, FDI does
not have any significant impact on the services export of
India. Thereby accepting the alternate hypothesis, that is,
FDI does have significant impact on the services export
of India. We reject H0 = 0 i.e. FDI has no significant
impact on SEREXP and accept H1 0 i.e. FDI has a
significant impact on SEREXP. Stationarity is obtained
by running the ADF test on the first difference of the
variables. There is problem of auto-correlation between
the two variables (which can be seen from the Durbin
Watson stats). The relationship between FDI and
services export variables is found significant from the
Granger Casualty Test. The analysis reveal that services
export does not Granger cause FDI whereas FDI does
Granger cause services export.
Therefore, a
unidirectional causality is observed from FDI inflows to
services export. Thus from the analysis we can say that
FDI has a significant impact on the services export of
India. FDI inflow affects the growth of services export
of India. One of the main causes for the tremendous
growth of the services export and the service sector as a
whole is the inflow of FDI, which can be seen from this
study.

technological revolution and widespread use of the


information and communication technology (ICT),
international production fragmentation has emerged as a
key source of export growth, wherein FDI has played a
vital role in international splitting up of the production
process within vertically integrated manufacturing
industries. Through this process, firms have broken up
the production process and moved its constituent
activities abroad, producing components as well as
locating assembly activities in line with the principle of
comparative advantage (Athukorala and Suphachalasai,
2004; Arndt, 2003). Though this has traditionally been
observed extensively in commodity trade like garments,
foo twear, toys, handicrafts etc., it is now being applied
intensively to the service sector, in the form of Business
Process Outsourcing (BPOs). Besides software in which
India has already made an impact, there is good potential
for export of many other professional services, like
super-specialty hospital; satellite mapping; printing and
publishing; accounting, auditing and bookkeeping
services. It would be favourable for India to attract FDI
in those industries that have potential to compete
internationally and benefiting from more capital inputs
flowing in and additional gains from their marketing
competence, product-process technology and channels of
distribution. This scope is significant and as yet widely
untapped in the service sector. Hence, the importance of
FDI in export promotion in the services sector in India
should be pursued as a long-term policy objective.

Reference
Conclusion
To conclude, finally we can say that FDI has positively
influenced the growth of services export in the Indian
economy, after the liberalization period. During the post
liberalization period the trade policies undertaken by the
government (like the Foreign Trade Policy (2004-2009),
the National Telecom Policy (NTP) etc.), the changing
attitude of the government towards foreign direct
investment has increased export opportunities has
induced foreign investors to take advantage of India's
comparative advantage in the Service Sector. Since
services export is largely driven by information and
communication technology, rapid advancement in
information and communication technology (ICT) in
India is likely to generate significant scope for export
oriented services. There is a vast unlimited potential for
expansion of services export and India needs to boost its
export competitiveness and improve its prospects to
become a global player in services trade. Rapid

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Journal of Business Management & Social Sciences Research (JBM&SSR)

ISSN No: 2319-5614

Volume 2, No.11, November 2013

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