The Relationship between FDI outflows, Exports and GDP in India: An Application of the Autoregressive Distributed Lag Model

This study examines the long-run relationship between foreign direct investment outflows, exports and aggregate measure of GDP in India for the time period 1980 to 2014. In order to assess the long-run relationship, ARDL/Bounds testing approach to cointegration has been applied. At the end of the analysis, VAR Granger causality/Block exogeneity Wald test has also been applied to test for the causal relationship between the variables of interest. The results indicate that all the variables are cointegrated when FDI outflows have been taken as a dependent variable. The positive and statistically significant coefficient of export suggests that FDI outflows and export complement each other, both in the long and short-run. GDP is found to have a negative but statistically insignificant impact on FDI outflows. The dummy that is used to incorporate the shift in policy after the economic reforms of 1991 is found to have a positive but insignificant impact on FDI outflows. The results of the Granger causality test indicate a unidirectional causality running from exports to FDI outflows. A similar type of causality is found between exports and GDP running from GDP to exports. The results of the Granger causality test also suggest that there exists chain relationship among the variables i.e., GDP causes exports and exports, in turn,causes FDI outflows. It can be also inferred that export is a precondition for Indian firms to conduct overseas FDI operations.