Dynamics between trade openness, FDI and economic growth: evidence from an emerging economy

Bijoy Rakshit

29 citations0/0 files storedJournal of International Trade Law and Policy

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Global trade and economics International Business and FDI Economic Growth and Productivity

Abstract

Purpose This paper aims to examine the dynamics between trade openness, foreign direct investment (FDI) and economic growth in India over the period 1979 to 2017. This study further considers the role of pre and post-economic reforms in the analysis of these dynamics. Design/methodology/approach The authors apply the autoregressive distributed lag model to investigate the possible long-run associations among the variables. Zivot-Andrew unit root test was applied to detect the structural breaks present in the data series. Toda-Yamamoto causality approach has been applied to examine the direction of causality among the variables. Findings Findings show that trade openness exerts a negative impact on economic growth in the long-run. Although FDI inflow promotes economic growth in the long-run, FDI inflow does not seem to affect growth in the short-run. As far as causality analysis is concerned, findings confirm a unidirectional causality is flowing from FDI inflow and labour force to per capita gross domestic product growth in India. Practical implications The negative impact of trade openness on growth suggests that policymakers should implement more export-oriented policies to boost economic growth in the long-run. The ratio of exports to the total volume of trade has not increased satisfactorily over the years. Additionally, appropriate policies should aim at extracting the benefits of FDI inflow in the long-run. Originality/value Although several theoretical and empirical literature has investigated the nexus between FDI (or trade) and growth, this study, as a fresh attempt, investigates the long-run dynamics between trade openness, FDI, capital formation, labour force and economic growth in India.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1956A Contribution to the Theory of Economic Growth 1988On the mechanics of economic development 1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 2001Bounds testing approaches to the analysis of level relationships 1986Increasing Returns and Long-Run Growth 1988Testing for a Unit Root in Time Series Regression 1988Statistical analysis of cointegration vectors

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