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Does Inward FDI Lead to Export Global Business Review

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Performance in India? An Empirical © 2019 IMI
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DOI: 10.1177/0972150919832770
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Saileja Mohanty1
Narayan Sethi1

Abstract
This article investigates whether or not inward foreign direct investment (FDI) leads to export
performance in India over the time period 1980—2017. We use Augmented Dickey–Fuller and Phillip–
Perron unit root test to check the stationarity, and it confirms that all the variables are stationary at
first differences I(1). The auto regressive distributed lag (ARDL)-bound testing co-integration approach
confirms that there is no valid long-run relationship between considered variables. Results indicate the
insignificant negative impacts of FDI on real exports in long run but not in short run. Result of Granger
causality test confirms that there is a unidirectional causal relationship existing between the variables
where FDI has a Granger cause to export. Results of stability test suggest that there is no structural
instability in the residuals of equation of real exports. FDI does not work uniformly in all sectors, and
policymakers should understand the difference and identify their sector-wise policies relating with FDI.
The law and order should also be maintained, which is the essential part to attract the foreign investors.
At this stage, we can also set the direction of future research, that is, sector-wise study should be done
on the relationship between FDI and exports.

Keywords
Foreign direct investment, export, economic growth, India

Introduction
For the first four decades after achieving independence from the British colonial rule, the economic
policies of the Indian government were characterized by planning, control and regulation. There were
periodic attempts at market-oriented reform, usually following the balance of payments pressures, which
induced policy responses that combined exchange rate (ER) depreciation and an easing of restrictions on
foreign capital inflows. Moreover, in sectors upon which the government placed high priority, domestic

1
Department of Humanities and Social Sciences, National Institute of Technology (NIT) Rourkela, Odisha, India.

Corresponding author:
Narayan Sethi, Department of Humanities and Social Sciences, National Institute of Technology (NIT) Rourkela, Rourkela 769008,
Odisha, India.
E-mail: nsethinarayan@gmail.com
2 Global Business Review

firms were allowed to enter into technology licensing arrangements, which often involved an equity
stake as well. However, there was a general sense of discomfort with a foreign presence in industry,
particularly in ‘non-essential’ sectors like consumer goods. This culminated in a series of major policy
decisions in the late 1970s. Foreign capital helps in overcoming the drawbacks that a developing
economy faces (lack of adequate level of capital), as it brings in sufficient physical and financial capital,
investment funds technical know-how, skilled personnel, organizational experience, market information,
advanced production techniques, innovations in products and foreign exchange resources (Sahoo &
Sethi, 2017).
Foreign direct investment (FDI) is considered as a major source to promote economic growth, which
enhances technology, trade expansion, employment opportunities and incorporation of global market.
The share of foreign affiliates of transnational corporations (TNCs) in world exports rose over time,
reaching an estimated 33 per cent in 2005 (UNCTAD, 2006). The impact of FDI undertaken by TNCs on
host-country exports will differ according to its rationale. Resource and efficiency seekers evidently tend
to be more export-oriented than market or strategic asset seekers. As far as the literature review is
concerned, the debate of domestic market versus export orientation of foreign affiliates generally leads
to different conclusions (Sgard, 2001; Smarzynska, 2003).
FDI helps the host country to improve its export performance. By raising the level of efficiency and
the standards of product quality, FDI makes a positive impact on the host country’s export competitiveness.
Further, because of the international linkages of TNCs, FDI provides to the host country better access to
foreign markets. Also, where the foreign investment has been made with the specific intention of sourcing
parts/components (or even final products) from the host country to take advantage of low-cost conditions
(e.g., low wages), FDI contributes to exports directly (Sethi & Sucharita, 2013).
As a part of developing country, India was also concerned with issues pertaining to foreign private
capital inflow and trade liberalization initially. However, it later moved to liberalize its trade and investment
policies to include various investment incentives, particularly for foreign investors. As a consequence,
India, as a host country, has been successful in attracting a significant amount of FDI and raising its
volume of trade (export plus import) as percentage of GDP during the last two decades. The question
which naturally arises here is whether the increase in growth was brought about by trade liberalization and
FDI inflows. Therefore, it is important to explore the impact of inward FDI on the export performance of
India quantitatively for a better understanding about the linkages among FDI, trade performance and
economic growth. While India is a latecomer in drawing heavily on FDI to foster growth, it has attracted
booming FDI since the economic reform program of 1991. Earlier studies on India typically failed to find
significantly positive growth effects (e.g., Agrawal, 2005; Pradhan, 2002). FDI is widely regarded as
a composite bundle of capital inflows, knowledge and technology transfers (Balasubramanyam, Salisu,
& Sapsford, 1996). Hence, the impact of FDI on growth is expected to be manifold (De Mello, 1997).
Greenfield FDI, in particular, may complement local investment and can thus add to the production
capacity of the host country. FDI plays an imperative role that boost the export performance of economies
(Blake & Pain, 1994; Culem, 1988; Davaakhuu, Sharma, & Bandara, 2014; Jiang, Liping, & Sharma,
2013; Ozawa, 1992; Pain & Wakelin, 1998; Shahbaz & Rahman, 2012; Sun & Parikh, 2001). However,
this study is concerned to examine the macroeconomic effect of inward FDI on trade performance.
From Figure 1, we can see that in the 1980s and 1990s both FDI and exports are increasing at different
rates. From 1996 to 2007, export was increasing at a decreasing rate, while FDI was increasing after
2000. After the 2000s, both FDI and export are increasing very significantly at an increasing rate. It is
also found that export performance in India is better than the FDI in the last three decades.
India has expanded its market since the beginning of the last decade (especially from July 1991) by
lowering tariff and non-tariff barriers as well as liberalizing investment policy. India’s factor market
Mohanty and Sethi 3

Figure 1.  FDI and Exports in India (US Million $)

Source: The authors.

including infrastructure sector is less efficient as compared with many East and South East Asian
countries with whom India competes in international market (Srinivasan, 1998). Hence, it is possible to
argue that even with the policy liberalization, India may have failed to attract a significant amount of
export-oriented FDI. In the light of the aforementioned debate, the aim of this article is to examine
whether or not FDI has made any significant contribution to India’s export growth. India is the second
largest country in the world and the first largest in South Asia in terms of population. Therefore, it is an
ideal economy for the multinational firms to start their operations in order to supply their products to an
economy with such teeming population. India has made significant progress in macroeconomic
performance with the help of inward FDI especially in the 1980s and 2000s. In the last two decades,
trade liberalization and incentives to attract FDI and market reforms were employed in various sectors to
reduce restrictions and develop the scope for the same. The question is whether FDI is correlated with
aggregate exports in India. This study examines this by using time series annual data of India covering
the period from 1980 to 2017 and by applying more rigorous econometric techniques. This research will
provide some policy implications related to FDI–export nexus for developing economies like India. The
remaining part of this article is organized into five sections including introduction. The second section
presents the review of literature. The third section discusses the methodology: data sources, econometric
tools and empirical model of the study. The fourth section presents the empirical analysis and results.
The fifth section presents the summary, conclusion and policy implication of the study.

Review Literature
Numerous studies have contributed on the role of FDI in economic growth, and the impact of inward FDI
flows on economic performance. Many empirical studies have tried to explain the relationship between
FDI and growth (Ozturk, 2007). In most of these studies, the researchers found that FDI has a positive
effect on growth (Alfaro, Chanda, Kalemli-Ozcan, & Sayek, 2010; Basu, Chakraborty, & Reagle, 2003;
Batten & Vo, 2009; Campos & Kinoshita, 2002; Ghatak & Halicioglu, 2007; Hansen & Rand, 2006;
Hermes & Lensink, 2003; Lensink & Morrissey, 2006; Li & Liu, 2005; Makki & Somwaru, 2004).
In many studies dealing with subsets of the countries, FDI or FDI in combination with some other factor
or factors is positively related to growth, while several studies (Chakraborty & Basu, 2002; Chowdhury
4 Global Business Review

& Mavrotas, 2003; Dhakal, Rahman, & Upadhyaya, 2007) have found no significant relationship
between FDI and growth. Most studies have stressed the differences among the sets of countries included
regarding their trade policies, institutional characteristics or level of development. Some noteworthy
studies are Scaperlanda and Mauer (1969), Dunning (1970) and Vernon (1971). The earlier studies by
Rugman (1994), Root and Ahmed (1978), Graham and Krugman (1995) O’Sullivan and Geyikdagi
(1994), Lin (1995), Tsai (1994) and Chao and Eden (1994), among others, have examined the factors that
influence the inward FDI.
Marino (2000) investigated the possibility that the trade policy regime followed by host countries
influences significantly both the amount of inward FDI received by recipient countries and the impact of
FDI on growth. The author had used different indicators in order to measure the degree of openness of
an economy and found that inward FDI affects positively to export performance. However, a study by
Jawaid, Raza, Mustafa, and Karim (2016) found that there is a bidirectional relationship existing between
FDI and export. He did not find any short-run casual relation between these two variables. Finally, he
concluded that FDI in India is mostly for efficiency seeking, that is, vertical FDI exists in India which
will help to grow the market size, so horizontal FDI can be achieved.
Liu et al. (2002) investigated the causal links between trade, economic growth and inward FDI in
China. The study revealed that economic development, exports and FDI appeared to be mutual in forcing
under the open-door policy. Similarly, the study by Agosin and Mayer (2000) analysed the effect of
lagged values of FDI inflows on investment rates in host countries during 1970–1995. They concluded
that the effects of FDI are by no means always favourable, and simplistic policies are unlikely to be
optimal. Attari, Kamal, and Attaria (2011) examined the impact of FDI on economic growth, export and
import of Pakistan. They found that economic and political instability is the major reason for not affecting
economic growth positively. They suggested that the government has to develop strong monetary and
fiscal policy by way of which there will be proper utilization of loans and grants.
Zhang and Felmingham (2001) evaluated the casual relationship between inward FDI and export
performance of China. They found from Granger casualty test that there is a bidirectional causal
relationship existing between FDI and export. Similarly, a recent study by Sultan (2013) examined the
relationship between export and FDI in India, over the time 1980–2010 by using Johansen’s co-integration
method and found that a stable long-run equilibrium relationship exists between FDI and export. The
study concluded that there is a unidirectional relationship between FDI and export.

Objectives
By considering inward FDI, it is important to evaluate whether or not inward FDI has significant impact
on export in India. The study aims to empirically examine the long-run and short-run impact of inward
FDI on export performance in India. It also examines the causal relationship between FDI and export
with other macroeconomic variables such as GDP, gross fixed capital formation (GFCF), labour and ER.

Rationale of the Study

The present study examines whether or not inward FDI leads export performance in India with other
selected macroeconomic indicators. Most of the earlier studies have examined the FDI and export
relationship in case of cross-country analysis by using panel data. Earlier studies have made a mistake
regarding the selection of the variables. Most of the earlier studies have ignored important variables
Mohanty and Sethi 5

such as ER, physical capital and labour. Very few studies empirically tested the impact of inward of FDI
on export performance. Most of earlier studies measure the impact of FDI on economic growth. This
study considered the variables like labour and capital, where labour and capital play a vital role to create
export-oriented country. FDI improves not only the employment opportunities but also increases
modern technology, which will help to create export-oriented country. This study has used appropriate
econometric tools, that is cointegration test and autoregressive distributed lag (ARDL) technique
to analyse the short-run and long-run relationship between FDI and export performance in India.
After that, this study employs different diagnostic criteria to test the reliability and robustness of the
empirical results.

Methodology
To examine the long-run impact of FDI on export performance, we use the time series data to establish
a relationship between FDI and export in India. This article frames annual time series data from 1980 to
2017. Data are sourced from World Bank (2017) and Reserve Bank of India (2017). We have chosen this
time period since the database for the variables taken into account is available.

LEXP = f (LNGDP, LNGFCF, LNFDI, LNLAB, and LNER)(1)

LEXPt = a t + b 1 LNGDP + b 2 LNFDI + b 3 LNGFCF + b 4 LNER + b 5 LNLAB + f t(2)

where t = 1, 2, …, T referring to the time period. The parameters b1, b2, b3, b4 and b5 represent the long-
run elasticity estimates of export with respect to economic growth and financial development indicators,
and ft is the white noise error term. The hypothesis of the article is given as follows:

H1: There is no long-run relationship between FDI and export.

H2: There is a short-run relationship between FDI and export.

Table 1.  Description of the Variables and Expected Signs

Variables Symbol Measurement Sign Source

Dependent variable
Export LNEXP Export of goods and services Positive WDI
(current US$)
Independent variables
Gross domestic product LNGDP Gross domestic product (Current Positive WDI
US$)
Physical capital LNGFCF Gross fixed capital Formation Positive WDI
(current US$)
Labour force LNLAB Labour force participation rate, total Positive WDI
(% of total population ages 15–64)
Foreign direct investment LNFDI Foreign direct investment, net inflows Positive WDI
(% of GDP)
Exchange rate LNER Annual average (US$) Positive RBI
Source: The authors.
6 Global Business Review

In this study, 38-year-long annual time series data of India have been used from 1980 to 2017. Data of
exports, FDI, ER, gross domestic product (GDP), labour, gross fixed capital formation are gathered from
several issues of WDI and RBI of India. All variables are used in logarithm form. Augmented Dickey–
Fuller (ADF) (Dickey & Fuller, 1979) and Phillips–Perron (PP) (Phillips & Perron, 1988) unit root tests
are used to examine the stationary properties for a long-run relationship of considered variables. The
present study employs the ARDL technique to analyse the long-run relationship between FDI and export
performance in India. Augmented Dickey–Fuller and Phillips–Perron unit root tests are used to examine
the stationary properties for the long-run relationship of time series variables.
This study employed recently developed ARDL-bound testing approach of cointegration developed
by Pesaran (1997), Pesaran and Shin (1999) and Pesaran, Shin, and Smith (2001). Due to the low
power and other problems associated with other test methods, the ARDL approach to cointegration has
become popular in recent years. The ARDL cointegration approach has numerous advantages in
comparison with other cointegration methods such as Engle and Granger (1987), Johansen (1988), and
Johansen and Juselius (1990) procedures: first, the ARDL procedure can be applied whether the
regressors are I(1) and/or I(0). The ARDL model for the standard log-linear functional specification
of the long-run relationship among GDP, export (EX), FDI, ER, labour (LAB) capital (GFCF) labour
may follow as:

DEXPt = b 0 + b 1 | i = 1 DEXPt - i + b 2 | i = 1 DGDPt - i + b 3 | i = 1 DFDI t - i

P P P

+ b 4 | i = 1 DER t - i + + b 5 | i = 1 DLAB t - i + b 6 | i = 1 DCAPt - i + c 1 EXPt - 1

P P P

+ c 2 GDPt - 1 + c 3 FDI t - 1 + c 4 ER t - 1 + c 5 LAB t - 1 + c 6 CAPt - 1 + n t (3)

where b0 is constant and nt is a white noise error term, the error correction dynamics is denoted by
summation sign, while the second part of the equation corresponds to the long-run relationship. The null
hypothesis of the cointegration is (H0 = c1= c2 = c3 = c4 = c5 = c6 = 0). The null hypothesis of no
cointegration is rejected, if the calculated F-test statistics exceeds the upper critical bound (UCB) value.
If the long-run relationship between FDI and export performance is found, then we estimate the long-run
coefficients. The following model is used to estimate the long-run coefficients:

EXPt = x 0 + x 1 | i = 1 EXPt - 1 + x 2 | i = 1 GDPt - 1 + x 3 | i = 1 FDI t - 1

P P P


+ x 4 | i = 1 ER t - 1 + x 5 | i = 1 LAB t - 1 + x 6 | i = 1 CAPt - 1 + n t
P P P
(4)

We can estimate the short-run coefficients by employing the following model:

DEXPt = { 0 + { 1 | i = 1 DEXPt - i + { 2 | i = 1 DGDPt - i + { 3 | i = 1 DFDI t - i

P P P


+ { 4 | i = 1 DER t - i + { 5 | i = 1 DLAB t - i + { 6 | i = 1 DCAPt - i + nECM t - 1 + n t
P P P
(5)

The error correction model (ECM) shows the speed of adjustment needed to restore the long-run
equilibrium following a short-run shock. The ƞ is the coefficient of error correction term in the model
that indicates the speed of adjustment.
Mohanty and Sethi 7

Johansen Co-integration Test

Johansen co-integration technique is also used to analyse the existence of the long-run relationship of
FDI and export performance. Johansen’s co-integration test is based on mtrace and mmax statistics. First,
‘trace test’ co-integration rank ‘r’ is given as follows:

m trace = - T | j = r + 1 In (1 - m j)(6)
n

Second, mtrace maximum number of co-integrating vectors against r + 1 are presented in the following
way:

m max (r, r + 1) = - T In (1 - m j)(7)

The null hypothesis of the cointegration test is that there is no long-run cointegration among the variables.
If null hypothesis is rejected, it means that there is a significant long-run relationship among the series
of variables and vice versa.

Causality Analysis
The direction of causality between dependent and independent variables is analysed by Granger (1969)
causality test. We determine the causality analysis of our export performance model by using lag 1. Jones
(1989) favours the ad hoc selection method for lag length in Granger causality test over some of other
statistical methods to determine optimal lag. The equation of Granger causality model is given as follows:

Y = | i = 1 a i X t - i + | i = 1 b i Yt - i + f (8)
t t

X = | i = 1 m i X t - i + | i = 1 d i Yt - i + e (9)
t t

It is assumed that e and f are uncorrelated.

Analysis
This study uses the ADF and Phillips–Peron tests to check the stationary properties of the time-series
variables. The result of unit root test is presented in Table 2.
Table 2 presents the unit root tests results. The unit root tests reported are for the both level and first
differenced series of these variables for hypothesis of non-stationarity. At levels when variables are used
at first difference, it becomes stationary at I(1). Consequently, as time series data are stationary at first
difference, the series follow stochastic trends and therefore can be co-integrated as well. Therefore, it can
be concluded that the variables are integrated of order one I(1), indicating a possible long-run
co-integrating relation among them.
ARDL method for co-integration is used to estimate the long-run relationship between FDI and export
performance. The first step is to determine the optimal lag length of the model. The order of optimal lag
Table 2.  Unit Root Test Results

ADF PP
Level First Differences Level First Differences
Variables C C&T C C&T C C&T C C&T
LNEXP 0.35114 −2.171878 −4.08159* −4.02052* 0.137871 −2.183495 −4.039649* −3.980290*
(0.9779) (0.4901) (0.0031) (0.0168) (0.9645) (0.484) (0.0034) (0.0185)
LNGDP 1.336556 −1.384275 −5.515855* −5.867329* 1.347538 −1.38643 −5.551264* −5.867570*
(0.9984) (0.8491) (0.0001) (0.0001) (0.9984) (0.8485 (0.0000) (0.0001)
LNFDI −0.890127 −3.283047 −6.402371* −4.418863* −0.576125 −3.283047 −7.442132* −7.306168*
(0.7802) (0.0849) (0.0000)  (0.0073)  (0.8639) (0.0849)  (0.0000) (0.0000)
LNER −2.723471 −1.068314 −4.212844* −4.721527* −2.347810 −1.226264 −4.307888* −4.747965*
(0.0797) (0.9210) (0.0021) (0.0029) (0.1631) (0.8901) (0.0017) (0.0027)
LNLAB −0.898138 −2.701457 −2.337467*** −2.329459 −0.028610 −1.595795 −2.506430*** −2.519625
(0.7774) (0.2420) (0.1663) (0.4083) (0.9497) (0.7754) (0.1224) (0.3174)
LNGFCF 0.169315 −1.556929 −5.417116* −5.379032* 0.056028 −1.783908 −5.455468* −5.418120*
 (0.9668) (0.7906) (0.0001) (0.0005) (0.9578) (0.6922) (0.0001) (0.0005)
Source: The authors
Note: *** and * indicate the 10 per cent, 1 per cent level of significance, respectively.
Mohanty and Sethi 9

Table 3.  Lag Length Selection and Bound Testing for Cointegration

Lag AIC SIC HQ F-statistic

0 −5.132121 −4.865490 −5.040080 20.18625 *
1 −18.32218 −16.45576* −17.67789
2 −19.38864 −15.92244 −18.19211
3 −20.93968* −15.87369 −19.19090*
Source: The authors.
Notes: *Indicates lag order selected by bound testing. AIC, Akaike Information Criterion; SIC, Schwarz information criterion;
HQ, Hannan–Quinn Information Criterion.

length is decided by using the SIC. Table 3 shows the results of ARDL co-integration method. The ARDL
results suggest the rejection of null hypothesis of no co-integration in model because the value of the
F-statistics is greater than the UCB value at 5 per cent level of significance in favour of alternative
hypothesis that a valid long-run relationship exists between FDI and real exports in India.
Now, we estimate the lag length order of all the variables through an unrestricted vector auto regression
method. The decision criterion is based on the minimum value of SIC. It explains individual lag selection
through VAR.
Table 4 represents the results of lag length order of all variables individually. Results of SIC indicate
that the real export should be included at second lag, while GDP, ER, GFCF and FDI should be included
at first lag, and labour should be included at second lag.
Table 5 presents the results of Johansen’s cointegration test. Results suggest a valid long-run
relationship exists between the considered variables. Hence, tests suggest that there exists a stable long-
run equilibrium relationship of exports with its major determinants such as GDP, ER, FDI, Labour (LAB)
and Capital (GFCF).
After having the valid evidence of long-run relationship between FDI and export performance, we
applied the ARDL method to estimate the long-run and short-run coefficients. The model for long-run
coefficients is given as follows:

EXPt = j 0 + j 1 | i = 1 EXPt - 1 + j 2 | i = 1 EXPt - 2 + j 3 | iP= 1 | i = 1 FDI t + j 4 | i = 1 FDI t - 1

P P P P

+ j 5 | i = 1 GDPt + j 6 | i = 1 GDPt - 1 + j 7 | i = 1 ER t + j 8 | i = 1 ER t - 1 + j 9 | i = 1 GFCFt

P P P P P

+ j 10 | i = 1 GFCFt - 1 + j 11 | i = 1 LAB t + j 12 | i = 1 LAB t - 1 + j 13 | i = 1 LAB t - 2 + n t

P P P P
(10)

Table 4.  Lags Defined Through VAR of Variables

Lag 0 1 2 3 Selected Lag

LNEXP  3.401698 −1.605121 −1.680153* −1.623065 2
LNGDP  4.694206 2.327111* 2.379332  2.383220 1
LNFDI 2.464069 −2.190878* −2.133864 −2.101245 1
LNER  1.729347 −2.539269* −2.520887 −2.483432 1
LNGFCF  2.764989  −1.498807* −1.446172 −1.427619 1
LNLAB 3.323556 −6.933505 −7.621435* −7.567296 2
Source: The authors.
Note: *Indicates lag order selected by VAR.
10 Global Business Review

Table 5.  Johansen–Juselius Co-integration Test

Hypothesized
No. of CE(s) Eigenvalue Trace Statistic 0.05 Critical Value Prob.*
None* 0.656971 125.3490 95.75366 0.0001
At most 1* 0.637745 86.83121 69.81889 0.0012
At most 2* 0.487046 50.27657 47.85613 0.0291
At most 3 0.341356 26.24409 29.79707 0.1215
At most 4 0.266702 11.21150 15.49471 0.1988
At most 5 0.001227 0.044188 3.841466 0.8335
Source: The authors.
Notes: Trace test indicates three co-integrating equation(s) at the 0.05 level.
*Denotes rejection of the hypothesis at the 0.05 level.

Table 6 presents that the results of long-run ARDL estimations are negative and statistically not
significant; hence, no long-run relationship exists between FDI and export performance in India, which
means that the FDI coming into India does not contribute to the enhancement of export performance of
India. The following model is used to check the short-run relationship among the considered variables
with the different lag length:

DEXPt = m 0 + m 1 | i = 1 DEXPt - 1 + m 2 | i = 1 DEXPt - 2 + m 3 | i = 1 DFDI t

P P P

+ m 4 | i = 1 DFDI t - 1 + m 5 | i = 1 GDPt + m 6 | i = 1 DGDPt - 1 + m 7 | i = 1 DER t

P P P P

+ m 8 | i = 1 DER t - 1 + m 9 | i = 1 DGFCFt + m 10 | i = 1 DGFCFt - 2 + m 11 | i = 1 DLAB t

P P P P

+ m 12 | i = 1 DLAB t - 1 + m 13 | i = 1 DLAB t - 2 + nECM t - 1 + n t

P P
(11)

Table 7 presents the short-run relationship between FDI and export performance. Results indicate that
the lagged error correction term for the estimated export equation is negative and statistically significant.
This confirms that there is a valid short-run relationship between FDI and export performance in India.

Table 6.  Long-run Results Using ARDL Approach

Variable Coefficient Std Error T-statistic Prob.

C 0.875478 12.05961 0.072596 0.9428
LNEXP (−1) 0.772262 0.200684 3.848155 0.0009
LNEXP (−2) −0.060801 0.173734 −0.349968 0.7297
LNFDI −0.031598 0.025758 −1.226696 0.2329
LNFDI (−1) −0.010579 0.021942 −0.482103 0.6345
LNGDP −0.501408 0.666173 −0.752669 0.4596
LNGDP (−1) −0.166917 0.528617 −0.315762 0.7552
LNER −0.814916 0.480771 −1.695018 0.1042
LNER (−1) 1.017850 0.476904 2.134287 0.0442
LNGFCF 0.546421 0.424510 1.287180 0.2114
LNGFCF (−1) 0.401686 0.384487 1.044733 0.3075
LNLAB −0.367935 3.743705 −0.098281 0.9226
LNLAB (−1) 2.046084 5.637944 0.362913 0.7201
LNLAB (−2) −1.592481 3.653633 −0.435862 0.6672
(continued)
Mohanty and Sethi 11

Table 6.  (continued)

Variable Coefficient Std Error T-statistic Prob.

R2
0.998069 Mean dependent variable 25.01013
Adjusted R2 0.996928 SD dependent variable 1.324924
SE of regression 0.073432 Akaike info criterion −2.099622
Sum-squared residual 0.118629 Schwarz criterion −1.483809
Log likelihood 51.79320 Hannan–Quinn criterion −1.884687
F-statistic 874.7838 Durbin–Watson statistics 2.083273
Prob (F-statistic) 0.998069
Source: The authors.

Table 7. Short-run Results Using the ARDL Approach

Variable Coefficient Std Error T-statistic Prob.*

C −0.225459 0.057527 −3.919187 0.0008
DLNEXP (−1) 0.958381 0.179124 5.350383 0.0000
DLNEXP (−2) −0.069718 0.095661 −0.728806 0.4746
DLNFDI −0.039028 0.013190 −2.959026 0.0078
DLNFDI (−1) −0.046901 0.011381 −4.121054 0.0005
DLNGDP 0.714953 0.414627 1.724329 0.1001
DLNGDP (−1) 0.974042 0.362099 2.689990 0.0141
DLNER 0.080178 0.341293 0.234923 0.8167
DLNER (−1) 1.607830 0.270839 5.936483 0.0000
DLNLAB 3.658177 2.123802 1.722466 0.1004
DLNLAB (−1) 3.936624 2.121205 1.855844 0.0783
DLNLAB (−2) −4.557062 1.855142 −2.456449 0.0233
DLNGFCF 0.347893 0.213888 1.626514 0.1195
DLNGFCF (−1) 0.213594 0.212410 1.005577 0.3266
ECT (−1) −1.481634 0.238627 −6.209007 0.0000
R-squared 0.886645 Mean dependent variable 0.106053
Adjusted R2 0.807296 SD dependent variable 0.103919
SE of regression 0.045618 Akaike info criterion −3.039483
Sum-squared residual 0.041621 Schwarz criterion −2.372905
Log likelihood 68.19095 Hannan–Quinn criterion −2.809381
F-statistic 11.17404 Durbin–Watson statistics 2.069559
Prob. (F-statistic) 0.000001
Source: The authors.

The coefficient of FDI shows that in the short run 1 per cent increase in FDI causes the decrease in the
real exports by −0.039 per cent. The results also suggest that the FDI coming in India is needed more
green field in nature in short run which means that the FDI is contributing to the increase in the GDP in
short run not in long run.
12 Global Business Review

Figure 2.  CUSUM Test

Source: The authors.

Figure 3.  CUSUM Square Test

Source: The authors.

Stability of Long-run Model

The stability of long-run model is evaluated by using the CUSUM and CUSUM square test on the
recursive residuals. CUSUM test detects systematic changes from the coefficients of regression, while
the CUSUM square test is able to detect the sudden changes from constancy of regression coefficients
(Brown, Durbin, & Ewans, 1975). Figures 2 and 3 represent the results of CUSUM and CUSUM square
tests, respectively. Results indicate that the statistics of both tests lie within the interval bands at 5 per
cent confidence interval. Results suggest that there is no structural instability in the residuals of equation
of real exports.
Table 8 presents the Granger causality test. It shows that a unidirectional relationship exists between
FDI and export, which implies value changes in FDI affect changes in the value of export performance,
Mohanty and Sethi 13

Table 8.  Granger Causality Test

Null Hypothesis Direction of Causality Obs. F-statistic P-value

LNFDI does not Granger cause LNEXP LNFDI & LNEXP 36  3.32297 0.0493
LNLAB does not Granger cause LNEXP LNLAB + LNEXP 36  3.47148 0.0436
LNEXP does not Granger cause LNLAB LNEXP + LNLAB 36  6.05178 0.0060
LNER does not Granger cause LNFDI LNER & LNFDI 36  5.83462 0.0071
LNLAB does not Granger cause LNGDP LNLAB + LNGDP 36  4.35725 0.0215
LNGDP does not Granger cause LNLAB LNGDP + LNLAB 36  7.61572 0.0020
LNGFCF does not Granger cause LNLAB LNGFCF + LNLAB 36  7.58395 0.0021
LNLAB does not Granger cause LNGFCF LNLAB + LNGFCF 36  4.77444 0.0156
Source: The authors.

where other variables like labour and export have a two-way causal relation, and labour and GDP and
capital and GDP also have a bidirectional relationship. But in ER, it is a unidirectional relationship where
ER has a Granger cause on FDI.

Conclusion and Policy Implications

This study contributes to the recent empirical literature of inward FDI–export nexus. This study finds
that that ARDL-bound testing co-integration approach confirms that there is no valid long-run relationship
between considered variables. Results indicate that there is a negative and significant impact of FDI on
real exports in long run but positive in the short run. From the Granger causality test, it is found that there
is a unidirectional relationship exists between FDI and export not between export and FDI. This implies
that inflow of FDI in India is mostly for efficiency seeking (vertical FDI), not for growing market size
determined by high population and economic growth (horizontal FDI).
As we know, FDI is healthy for developing nations to overcome their saving–investment gap by
allowing more FDI inflows. So, policy implication of this study indicates that policy should be formulated
by the government which can attract more FDI that will help to expand the market size which will
improve the economic growth and help to create export promotion and import substitution of the country.
This study suggests that the government should encourage more export-oriented FDI to have a direct
effect on export growth leading to growth of the economy. Simultaneously, FDI does not work uniformly
in all sectors, and policymakers should understand the difference and identify their sector-wise policies
relating with FDI. The law and order should also be maintained, which is the essential part to attract the
foreign investors. At this stage, we can also set the direction of future research, that is, sector-wise study
should be done on the relationship between FDI and exports which will help in formulating export-
promoting policies for the country.

Acknowledgements
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.
14 Global Business Review

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

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