Skip to main content
SpringerLink
Log in
Book cover

Foreign Direct Investment in South Asia pp 269–308Cite as

Impact of Foreign Direct Investment on Domestic Exports: Time Series and Panel Evidence from South Asia

  • Chapter
  • First Online:

  • 1739 Accesses

Abstract

In Chaps. 7 and 8, we assessed the impact of FDI inflows on growth and domestic investment, and results indicate that FDI has a positive impact on both growth and domestic investment. In this chapter, we examine the impact of FDI inflows on exports for South Asian countries using export demand and supply function. For comparative purpose, the role of FDI in promoting China’s exports is also examined. The results indicate that FDI promotes exports in India, Pakistan, Sri Lanka, and Bangladesh. On the other hand, FDI does not promote exports in Nepal. Panel data analysis also shows that the impact of FDI on export supply in South Asia is positive and statistically significant. In the case of China, we find significant impact of FDI on China exports, and the positive is higher compared to South Asian countries. Causality test performed using both time series and panel methodology indicates that for India, Pakistan, Sri Lanka, and Bangladesh FDI leads to increased export, which is one way and causality is not found in other direction. For Nepal, there is no causality in either direction. Similar result is also found for manufacturing exports for South Asian countries. The analysis highlights the fact that by emulating the policies followed by China and Singapore and with the right mix of domestic policies for FDI by South Asian countries, particularly, India can substantially enhance its export competitiveness in the international market and total exports.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    Except the few years following the East Asian currency crisis.

  2. 2.

    Horizontal FDI is defined as investment in the same industry abroad as a firm operates in at home. In contrast, vertical FDI takes two forms: (1) backward vertical FDI, where an industry abroad provides inputs for a firm’s domestic production process, and (2) forward vertical FDI, in which an industry abroad sells the outputs of a firm’s domestic production processes.

  3. 3.

    A number of empirical studies (e.g. Goldstein and Khan 1985; Bushe et al. 1986; Arndt and Hueme 2004, Athukorala 2004; Chinn 2005) have examine export behaviour using a single-equation approach where both demand and supply equations are solved together to yield an expression for the equilibrium volume of exports.

References

  • Aggarwal A (2002) Liberalization, multinational enterprises and export performance: evidence from Indian manufacturing. J Dev Stud 38(3):119–137

    Article  Google Scholar 

  • Aghion P, Griffith R (2005) Competition and growth: reconciling theory and evidence. MIT Press, Cambridge, MA

    Google Scholar 

  • Aitken B, Hansen GH, Harrison AE (1997) Spillovers, foreign investment and export behaviour. J Int Econ 43:103–132

    Article  Google Scholar 

  • Alıcı AA, Ucal MS (2003) Foreign direct investment, exports and output growth of Turkey: causality analysis. Paper presented at the European Trade Study Group (ETSG) fifth annual conference, Madrid.

    Google Scholar 

  • Ancharaz VD (2003) Determinants of trade policy reform in Sub-Saharan Africa. J Afr Econ 12(3):417–443

    Article  Google Scholar 

  • Arize A (1987) The supply and demand for imports and exports in a simultaneous model. Appl Econ 19:1233–1247

    Article  Google Scholar 

  • Arize A (1990) An econometric investigation of export behaviour in seven Asian developing countries. Appl Econ 22(7):891–904

    Article  Google Scholar 

  • Arndt SW, Hueme A (2004) Trade, production networks and the exchange rate. Lowe Institute of Political Economy, Claremont McKenna College, Claremont. Available: ssrn.com/abstract = 900416

    Google Scholar 

  • Athukorala P (2004) Post-crisis export performance in Thailand. ASEAN Econ Bull 211:19–36

    Article  Google Scholar 

  • Awokuse TO (2003) Is the export‐led growth hypothesis valid for Canada? Can J Econ/Revue canadienne d’économique 36(1):126–136

    Article  Google Scholar 

  • Balassa B (1978) Exports and economic growth: further evidence. J Dev Econ 5(2):181–189

    Article  Google Scholar 

  • Balasubramanyam VN, Salisu MA, Sapsford D (1996) Foreign direct investment and growth in EP and IS countries. Econ J 106(434):92–105

    Article  Google Scholar 

  • Baliamoune-Lutz MN (2004) Does FDI contribute to economic growth? Knowledge about the effects of FDI improves negotiating positions and reduces risk for firms investing in developing countries. Bus Econ 39(2):49–56

    Google Scholar 

  • Banga R (2003) Impact of government policies and investment agreements on FDI inflows, Working paper, no. 116. Indian Council for Research on International Economic Relations, New Delhi

    Google Scholar 

  • Barrios S, Görg H, Strobl E (2003) Explaining firms’ export behaviour: R&D, spillovers and the destination market. Oxford Bull Econ Stat 65(4):475–496

    Article  Google Scholar 

  • Bhagwati J (1978) Anatomy and consequences of exchange control regimes. Balinger Publishing, New York

    Google Scholar 

  • Bhagwati JN (1982) Introduction to “import competition and response”. In: Bhagwati JN (ed) Import competition and response. University of Chicago Press, Chicago, pp 1–8

    Chapter  Google Scholar 

  • Bhagwati J (1988). Is free trade passe after all? Weltwirtschaftliches Archiv 125: 17–44; reprinted as Chapter I in J. Bhagwati, Political Economy and International Economics (ed. Douglas Irwin). MIT Press, Cambridge, MA

    Google Scholar 

  • Bhalla AS (1995) Recent economic reforms in China and India. Asian Surv 35(6):555–572

    Article  Google Scholar 

  • Biggs T (2007) Export promotion and diversification: what DO we learn from the DTISs in low-income countries? Unpublished, World Bank, Washington, DC

    Google Scholar 

  • Biggs T, Shah M, Srivastava P (1996) Technological capability and learning in African firms. Regional program for enterprise development, technical paper, World Bank, Washington, DC

    Google Scholar 

  • Blake AP, Pain N (1994) Investigating structural change in UK export performance: the role of innovation and direct investment, NIESR discussion paper, no.71, London

    Google Scholar 

  • Blomström M, Lipsey RE, Kulchycky K (1988) US and Swedish direct investment and exports. In: Baldwin RE (ed) Trade policy issues and empirical analysis. Chicago University Press, Chicago

    Google Scholar 

  • Bougheas S, Demetriades PO, Morgenroth ELW (1999) Infrastructure, transport costs and trade. J Int Econ 47:169–189

    Article  Google Scholar 

  • Brainard SL (1993) A simple theory of multinational corporations and trade with a trade-off between proximity and concentration, NBER working paper, no. 4269. National Bureau of Economic Research, Cambridge, MA

    Google Scholar 

  • Bushe DM, IKravis IB, Lipsey RE (1986) Prices, activity, and machinery exports: an analysis based on new price data. Rev Econ Stat 682:248–255

    Article  Google Scholar 

  • Cabral S (1995) Comparative export behaviour of foreign and domestic firms in Portugal. Banco de Portugal Econ Bull 96:69–78

    Google Scholar 

  • Chinn MD (2005) Supply capacity. Vertical specialization and tariff rates: the implications for aggregate US trade flow equations. National Bureau of Economic Research, Working paper, no. 11719, Cambridge, MA

    Google Scholar 

  • Culem CG (1988) The location determinants of direct investments: among industrialized countries. Eur Econ Rev 32(4):885–904

    Article  Google Scholar 

  • Dash RK, Sharma C (2011) FDI, trade, and growth dynamics: New evidence from the post-reform India. Int Trade J 25(2):233–266

    Article  Google Scholar 

  • De Gregorio J (1992) Economic growth in Latin America. J Dev Econ 39:58–84

    Article  Google Scholar 

  • De Mello LR (1999) Foreign domestic investment-Led growth: evidence from time series and panel data. Oxford Econ Pap 51:133–151

    Article  Google Scholar 

  • Dornbusch R (1992) The case for trade liberalization in developing countries. J Econ Perspect 6(1):69–85

    Article  Google Scholar 

  • Dunning JH (1977) Trade, location of economic activity and the MNE: a search for an eclectic approach. In: Ohlin B, Hesselborn PO, Wijkmon PM (eds) The international location of economic activity. Macmillan, London, pp 395–418

    Google Scholar 

  • Edwards S (1998) Capital flows, real exchange rates and capital controls: some Latin American experiences, National Bureau of Economic Research, Working paper, no. 6000, Cambridge, MA

    Google Scholar 

  • Fry MJ (1993) Foreign direct investment in a macroeconomic framework: finance, efficiency, incentives and distortions, Working paper series, no.1141. World Bank, Washington, DC

    Google Scholar 

  • Fugazza M (2004) Export performance and its determinants: supply and demand constraints, Policy issues in international trade and commodities study series no. 26. UNCTAD, New York/Geneva

    Google Scholar 

  • Fukao K, Ishido H, Ito K (2003) Vertical intra-industry trade and foreign direct investment in East Asia. J Jpn Int Econ 17(4):468–506

    Article  Google Scholar 

  • Funke M, Holly S (1992) The determinants of West German exports of manufactures: an integrated demand and supply approach. Weltwirtschaftliches Archive 128:498–512

    Article  Google Scholar 

  • Girma S, Görg H, Hanley A (2008) R&D and exporting: a comparison of British and Irish firms. Rev World Econ 144(4):750–773

    Article  Google Scholar 

  • Goldstein M, Khan MS (1978) The supply and demand for exports: a simultaneous approach. Rev Econ Stat 60(2):275–286

    Article  Google Scholar 

  • Goldstein M, Khan M (1982) Effects of slowdown in industrial countries on growth in Non-oil developing countries, IMF occasional paper, no.12. International Monetary Fund, Washington, DC

    Google Scholar 

  • Goldstein M, Khan M (1985) Income and price effects in foreign trade. In: Jones R, Kenen P (eds) Handbook of international economics, vol 2. Elsevier, Amsterdam

    Google Scholar 

  • Greenaway D, Sousa N, Wakelin K (2004) Do domestic firms learn to export from multinationals? Eur J Polit Econ 20(4):1027–1043

    Article  Google Scholar 

  • Gu W, Awokuse TO, Yuan Y (2008) The contribution of foreign direct investment to China’s export performance: evidence from disaggregated sectors. Paper prepared for presentation at the American Agricultural Economics Association annual meeting, Orlando

    Google Scholar 

  • Haddad M, Harrison A (1993) Are there positive spillovers from direct foreign investment? J Dev Econ 42:51–74

    Article  Google Scholar 

  • Hall S, Milne A (1994) The relevance of p-star analysis to UK monetary policy. Econ J 104:597–604

    Article  Google Scholar 

  • Hausmann R, Hwang J, Rodrik D (2006) What you export matters, NBER working paper no. 11905, Cambridge, MA

    Google Scholar 

  • Helpman E (1984) A simple theory of international trade with multinational corporations. J Polit Econ 92:451–471

    Article  Google Scholar 

  • Helpman E (2006) Trade, FDI, and the organization of firms, NBER working paper, no. 12091. National Bureau of Economic Research, Cambridge, MA

    Google Scholar 

  • Helpman E, Krugman PR (1985) Market structure and foreign trade: increasing returns, imperfect competition, and the international economy. The MIT press, Cambridge

    Google Scholar 

  • Helpman E, Melitz MJ, Yeaple SR (2003) Export versus FDI with heterogeneous firms. Am Econ Rev 94(1):300–316

    Article  Google Scholar 

  • Horstmann I, Markusen JR (1992) Endogenous market structures in international trade. J Int Econ 20:225–247

    Article  Google Scholar 

  • Jeon Y (1992) The determinants of Korean foreign direct investment in manufacturing industries. Weltwirrtschaftliches Archiv 128(3):527–542

    Article  Google Scholar 

  • Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Control 12:231–254

    Article  Google Scholar 

  • Jones S (2006) Infrastructure challenges in East and South Asia. IDS bull 37(3):28–44

    Article  Google Scholar 

  • Joshi V, Little IMD (1994) India: macroeconomics and political economy 1964–1991. The World Bank, Washinton, DC

    Google Scholar 

  • Khan K, Leng K (1997) Foreign direct investment, exports and economic growth. Singap Econ Rev 42(2):40–60

    Google Scholar 

  • Kojima K (1982) A macroeconomic approach to foreign direct investment. Hitosubashi J Econ 14(1):1–21

    Google Scholar 

  • Kokko A, Zejan M, Tansini R (2001) Trade regimes and spillover effects of FDI: evidence from Uruguay. Weltwirtschaftliches Archiv 137:124–149

    Article  Google Scholar 

  • Krueger AO (1975) Foreign trade regimes and economic development: Turkey. National Bureau of Economic Research, New York, pp 271–339

    Google Scholar 

  • Krueger AO (1997) Trade policy and economic development: how we learn. Am Econ Rev 87(1):1–22

    Google Scholar 

  • Krueger A (1998) Why trade liberalisation is good for growth. Econ J 108(450):1513–1522

    Article  Google Scholar 

  • Krugman PR (ed) (1986) Strategic trade policy and the new international economics. MIT Press, Cambridge, MA

    Google Scholar 

  • Kumar N, Pradhan JP (2003) Export competitiveness in the knowledge-based industries: a firm-level analysis of Indian manufacturing. Research and Information System for Developing Countries (RIS), New Delhi

    Google Scholar 

  • Kumar N, Siddharthan NS (1994) Technology, firm size, and export behavior in developing countries: the case of Indian enterprises. J Dev Stud 31(2):289–309

    Article  Google Scholar 

  • Lall S (1999) India’s manufactured exports: comparative structure and prospects. World Dev 27(10):1769–1786

    Article  Google Scholar 

  • Liu X, Wang C, Wei Y (2001) Causal links between foreign direct investment and trade in China. China Econ Rev 12(2):190–202

    Article  Google Scholar 

  • Liu XH, Burridge P, Sinclair PJN (2002) Relations between economic growth. FDI and trade: evidence from China. Appl Econ 34:1433–1440

    Article  Google Scholar 

  • Markusen JR (1983) Factor movements and commodity trade as complements. J Int Econ 13(3):341–356

    Article  Google Scholar 

  • Markusen JR (1995) The boundaries of multinational enterprises and the theory of international trade. J Econ Perspect 9(2):169–189

    Article  Google Scholar 

  • Markusen JR, Venables AJ (1998) Multinational firms and the new trade theory. J Int Econ 46(2):183–203

    Article  Google Scholar 

  • Metwally MM (2004) Impact of EU FDI on economic growth in middle eastern countries. Eur Bus Rev 16:381–389

    Article  Google Scholar 

  • Mundell RA (1957) International trade and factor mobility. Am Econ Rev 47(3):321–335

    Google Scholar 

  • Muscatelli VA, Srinivasan TG, Vines D (1992) Demand and supply factors in the determination of NIE exports: a simultaneous error correction model for Hong Kong. Econ J 102(415):1467–1477

    Article  Google Scholar 

  • O’Sullivan PJ (1993) An assessment of Ireland’s export-led growth strategy via foreign direct investment: 1960–80. Weltwirtschaftliches Archiv 129:139–158

    Article  Google Scholar 

  • Pain N, Wakelin K (1998) Export performance and the role of foreign direct investment. Manch Sch Econ Soc Stud 66(3):62–89

    Article  Google Scholar 

  • Pacheco-López P (2005) Foreign direct investment, exports and imports in Mexico. World Economy 28(8):1157–1172

    Article  Google Scholar 

  • Parida P, Sahoo P (2007) Export-led growth hypothesis in South Asia: a panel cointegration analysis. Int Econ J, Rutledge 21(2):155–175

    Google Scholar 

  • Pesaran M (2007) A simple panel unit root test in the presence of cross-section dependence. J Appl Econom 22:265–312

    Article  Google Scholar 

  • Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econom 16:289–326

    Article  Google Scholar 

  • Pradhan JP, Abraham V (2005) Attracting export-oriented FDI: can India win the race? Working paper, no.156. Gujarat Institute of Development Research, Ahmedabad

    Google Scholar 

  • Rana PB, Dowling JM (1990) Foreign capital and Asian economic growth. Asian Dev Rev 8(2):77–102

    Google Scholar 

  • Riedel J (1993) Vietnam: on the trail of the tigers. World Econ 16(4):401–422

    Article  Google Scholar 

  • Ruane F, Sutherland M (2004) Ownership and export characteristics of Irish manufacturing performance, IIIS discussion paper, 32, Dublin

    Google Scholar 

  • Sahoo P (2004a) FDI and technology exports in India. ICFAI J Appl Econ 3(3):25–36

    Google Scholar 

  • Sahoo P (2004b) Fiscal federalism in India: a review. Asian Econ Rev 48(4):25–36

    Google Scholar 

  • Sahoo P, Dash RK (2012) Economic growth in South Asia: role of infrastructure. J Int Trade Econ Dev 21(2):217–252

    Google Scholar 

  • Senhadji A, Montenegro C (1999) Time-series analysis of export demand equations: a cross-country analysis. IMF Staff Pap 46(3):259–273, International Monetary Fund :Washington D. C

    Google Scholar 

  • Sharma K (2003) Factors determining India’s export performance. J Asian Econ 14(3):435–446

    Article  Google Scholar 

  • Srinivasan TN (1998) India’s Export performance: a comparative analysis. In: Ahluwalia IJ, Little IMD (eds) India’s economic reforms and development essay for Manmohan Singh. Oxford University Press, Delhi

    Google Scholar 

  • Sun H (2001) Foreign direct investment and regional export performance in China. J Reg Sci 41(2):317–336

    Article  Google Scholar 

  • Sun S (2012) The role of FDI in domestic exporting: evidence from China. J Asian Econ 23(4):434–441

    Article  Google Scholar 

  • Sun SL, Peng MW, Ren B, Yan D (2012) A comparative ownership advantage framework for cross-border M&As: the rise of Chinese and Indian MNEs. J World Bus 47(1):4–16

    Article  Google Scholar 

  • UNCTAD (1996) World investment report 1996. United Nations, Geneva

    Google Scholar 

  • UNCTAD (1999) Trends in international investment agreements: an overview. United Nations Publication, New York, Sales No. E.99.11.D.23

    Google Scholar 

  • UNCTAD (2002) World Investment Report, annual. UN Publications, Geneva

    Google Scholar 

  • UNCTAD (2003a) World investment report. United Nations, Geneva

    Google Scholar 

  • UNCTAD (2003b) World investment report. United Nations Conference on Trade and Development, Geneva

    Google Scholar 

  • UNCTAD (2005) World investment report. United Nations Conference on Trade and Development, Geneva

    Google Scholar 

  • Vernon R (1966) International investment and international trade in the product cycle. Q J Econ 80:190–207

    Article  Google Scholar 

  • Wen M (2005) Foreign direct investment, regional geographical and market conditions, and regional development: a panel study on China, ANU working paper on trade and development, no.12. Australian National University, Canberra

    Google Scholar 

  • Westerlund J (2007) Testing for error correction in panel data. Oxford Bull Econ Stat 69:709–748

    Article  Google Scholar 

  • World Bank (1993) World development report 1993. Oxford University Press for the World Bank, New York

    Book  Google Scholar 

  • World bank (2011) World development indicator, 2011. World Bank, Washington, DC

    Google Scholar 

  • World Development Indicator (2012) World Bank, Washington, DC

    Google Scholar 

  • Xing Y (2006) Exchange rate policy and the relative distribution of FDI between host countries, Working papers EMS, no.10. Research Institute, International University of Japan, Helsinki

    Google Scholar 

  • Xuan NT, Xing Y (2008) Foreign direct investment and exports: the experience of Vietnam. Econ Trans 16(2):183–197

    Article  Google Scholar 

  • Zhang KH (2006) How does foreign direct investment affect economic growth in China? Econ Transit 9(3):679–693

    Article  Google Scholar 

  • Zhang Q, Felmingham B (2001) The relationship between inward direct foreign investment and China’s provincial export trade. China Econ Rev 12:82–99

    Article  Google Scholar 

  • Zhang KH, Song S (2000) Promoting exports: the role of inward FDI in China. China Econ Rev 11:385–396

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Institute of Economic Growth (IEG), Delhi University Enclave, Delhi, India

    Pravakar Sahoo

  2. Observer Research Foundation (ORF), Delhi, India

    Geethanjali Nataraj

  3. Indian Council for Research on International Economic Relations (ICRIER), Delhi, India

    Ranjan Kumar Dash

Authors
  1. Pravakar Sahoo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Geethanjali Nataraj
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ranjan Kumar Dash
    View author publications

    You can also search for this author in PubMed Google Scholar

Appendix

Appendix

Table 9.A.1 ADF unit root test
Full size table
Table 9.A.2 ARDL co-integration test
Full size table
Table 9.A.3 Panel unit root test using Pesaran (2007)
Full size table
Table 9.A.4 Westerlund (2007) error correction model panel co-integration tests
Full size table
Table 9.A.5 Westerlund (2007) error correction model panel co-integration tests
Full size table
Table 9.A.6 Unit root test using ADF
Full size table
Table 9.A.7 ARDL co-integration test (1980–2010)
Full size table

Rights and permissions

Reprints and permissions

Copyright information

© 2014 Springer India

About this chapter

Cite this chapter

Sahoo, P., Nataraj, G., Dash, R.K. (2014). Impact of Foreign Direct Investment on Domestic Exports: Time Series and Panel Evidence from South Asia. In: Foreign Direct Investment in South Asia. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1536-3_9

Download citation

Publish with us

Policies and ethics

Search

Navigation