Home Economy Trade Effect of Outward FDI: Evidence from India

Abstract

The surge in outward foreign direct investment (OFDI) flows from emerging economies has made it imperative to examine the impact of such flows on home country. An important area of enquiry is how the increased OFDI flows affect home country trade position- in terms of its causal relationship with both exports and imports. While the early theoretical literature posits OFDI and trade as substitutes, relatively later studies have argued that depending on the nature (vertical or horizontal FDI) and sector of investment, OFDI and trade could be complementary. India is not only the fastest growing emerging market but has recently become an important source of investment from emerging markets. The phenomenal rise in outward investment coupled with the importance of trade in India's economic structure raises concern about the impact of former on the latter. In this context, this study examines the impact of India's OFDI flows during 1997 to 2017 on its imports and exports. Using relatively recent time series econometric techniques that accounts for the existence of structural breaks in the underlying data, the results suggest while there does not exist longrun relationship between India's OFDI flows and its trade (exports and imports), OFDI flows granger causes India's imports in the short run. The observed short- run causality is found to be in line with the growing importance of resource seeking FDI from India and partially points out towards the role of India's involvement in the regional production networks. Managerial and policy implications are discussed.