Relationship between Inward FDI and Exports: Evidence from India

Abstract

The economic reforms that were ushered in during 1991 have greatly contributed to the growth of exports in India. After pursuing, import substitution strategy for nearly four decades, India adopted export led growth strategy in 1991. The new economic policy removed all sorts of restrictions on international trade and investment giving green signal to FDI inflows. Consequently, India experienced significant increase in FDI inflows in the last two decades. This paper has two objectives. First, it investigates the trends of FDI inflows and exports in India during the period 1980 to 2011. Secondly, it attempts to examine the economic relationship between FDI inflows and export growth in India for the same period using the Granger causality test. The study found bi-directional causality between inward FDI and exports. Hence, policies attracting FDI should be implemented to further boost India’ exports.