Advertisement

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

  • Pravakar Sahoo
  • Geethanjali Nataraj
  • Ranjan Kumar Dash
Chapter

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.

Keywords

Host Country Real Exchange Rate Export Performance Export Growth Foreign Affiliate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

  1. Aggarwal A (2002) Liberalization, multinational enterprises and export performance: evidence from Indian manufacturing. J Dev Stud 38(3):119–137CrossRefGoogle Scholar
  2. Aghion P, Griffith R (2005) Competition and growth: reconciling theory and evidence. MIT Press, Cambridge, MAGoogle Scholar
  3. Aitken B, Hansen GH, Harrison AE (1997) Spillovers, foreign investment and export behaviour. J Int Econ 43:103–132CrossRefGoogle Scholar
  4. 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
  5. Ancharaz VD (2003) Determinants of trade policy reform in Sub-Saharan Africa. J Afr Econ 12(3):417–443CrossRefGoogle Scholar
  6. Arize A (1987) The supply and demand for imports and exports in a simultaneous model. Appl Econ 19:1233–1247CrossRefGoogle Scholar
  7. Arize A (1990) An econometric investigation of export behaviour in seven Asian developing countries. Appl Econ 22(7):891–904CrossRefGoogle Scholar
  8. 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 = 900416Google Scholar
  9. Athukorala P (2004) Post-crisis export performance in Thailand. ASEAN Econ Bull 211:19–36CrossRefGoogle Scholar
  10. Awokuse TO (2003) Is the export‐led growth hypothesis valid for Canada? Can J Econ/Revue canadienne d’économique 36(1):126–136CrossRefGoogle Scholar
  11. Balassa B (1978) Exports and economic growth: further evidence. J Dev Econ 5(2):181–189CrossRefGoogle Scholar
  12. Balasubramanyam VN, Salisu MA, Sapsford D (1996) Foreign direct investment and growth in EP and IS countries. Econ J 106(434):92–105CrossRefGoogle Scholar
  13. 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):49–56Google Scholar
  14. 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 DelhiGoogle Scholar
  15. Barrios S, Görg H, Strobl E (2003) Explaining firms’ export behaviour: R&D, spillovers and the destination market. Oxford Bull Econ Stat 65(4):475–496CrossRefGoogle Scholar
  16. Bhagwati J (1978) Anatomy and consequences of exchange control regimes. Balinger Publishing, New YorkGoogle Scholar
  17. Bhagwati JN (1982) Introduction to “import competition and response”. In: Bhagwati JN (ed) Import competition and response. University of Chicago Press, Chicago, pp 1–8CrossRefGoogle Scholar
  18. 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, MAGoogle Scholar
  19. Bhalla AS (1995) Recent economic reforms in China and India. Asian Surv 35(6):555–572CrossRefGoogle Scholar
  20. Biggs T (2007) Export promotion and diversification: what DO we learn from the DTISs in low-income countries? Unpublished, World Bank, Washington, DCGoogle Scholar
  21. Biggs T, Shah M, Srivastava P (1996) Technological capability and learning in African firms. Regional program for enterprise development, technical paper, World Bank, Washington, DCGoogle Scholar
  22. Blake AP, Pain N (1994) Investigating structural change in UK export performance: the role of innovation and direct investment, NIESR discussion paper, no.71, LondonGoogle Scholar
  23. 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, ChicagoGoogle Scholar
  24. Bougheas S, Demetriades PO, Morgenroth ELW (1999) Infrastructure, transport costs and trade. J Int Econ 47:169–189CrossRefGoogle Scholar
  25. 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, MAGoogle Scholar
  26. Bushe DM, IKravis IB, Lipsey RE (1986) Prices, activity, and machinery exports: an analysis based on new price data. Rev Econ Stat 682:248–255CrossRefGoogle Scholar
  27. Cabral S (1995) Comparative export behaviour of foreign and domestic firms in Portugal. Banco de Portugal Econ Bull 96:69–78Google Scholar
  28. 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, MAGoogle Scholar
  29. Culem CG (1988) The location determinants of direct investments: among industrialized countries. Eur Econ Rev 32(4):885–904CrossRefGoogle Scholar
  30. Dash RK, Sharma C (2011) FDI, trade, and growth dynamics: New evidence from the post-reform India. Int Trade J 25(2):233–266CrossRefGoogle Scholar
  31. De Gregorio J (1992) Economic growth in Latin America. J Dev Econ 39:58–84CrossRefGoogle Scholar
  32. De Mello LR (1999) Foreign domestic investment-Led growth: evidence from time series and panel data. Oxford Econ Pap 51:133–151CrossRefGoogle Scholar
  33. Dornbusch R (1992) The case for trade liberalization in developing countries. J Econ Perspect 6(1):69–85CrossRefGoogle Scholar
  34. 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 395–418Google Scholar
  35. 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, MAGoogle Scholar
  36. Fry MJ (1993) Foreign direct investment in a macroeconomic framework: finance, efficiency, incentives and distortions, Working paper series, no.1141. World Bank, Washington, DCGoogle Scholar
  37. 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/GenevaGoogle Scholar
  38. Fukao K, Ishido H, Ito K (2003) Vertical intra-industry trade and foreign direct investment in East Asia. J Jpn Int Econ 17(4):468–506CrossRefGoogle Scholar
  39. Funke M, Holly S (1992) The determinants of West German exports of manufactures: an integrated demand and supply approach. Weltwirtschaftliches Archive 128:498–512CrossRefGoogle Scholar
  40. Girma S, Görg H, Hanley A (2008) R&D and exporting: a comparison of British and Irish firms. Rev World Econ 144(4):750–773CrossRefGoogle Scholar
  41. Goldstein M, Khan MS (1978) The supply and demand for exports: a simultaneous approach. Rev Econ Stat 60(2):275–286CrossRefGoogle Scholar
  42. 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, DCGoogle Scholar
  43. 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, AmsterdamGoogle Scholar
  44. Greenaway D, Sousa N, Wakelin K (2004) Do domestic firms learn to export from multinationals? Eur J Polit Econ 20(4):1027–1043CrossRefGoogle Scholar
  45. 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, OrlandoGoogle Scholar
  46. Haddad M, Harrison A (1993) Are there positive spillovers from direct foreign investment? J Dev Econ 42:51–74CrossRefGoogle Scholar
  47. Hall S, Milne A (1994) The relevance of p-star analysis to UK monetary policy. Econ J 104:597–604CrossRefGoogle Scholar
  48. Hausmann R, Hwang J, Rodrik D (2006) What you export matters, NBER working paper no. 11905, Cambridge, MAGoogle Scholar
  49. Helpman E (1984) A simple theory of international trade with multinational corporations. J Polit Econ 92:451–471CrossRefGoogle Scholar
  50. Helpman E (2006) Trade, FDI, and the organization of firms, NBER working paper, no. 12091. National Bureau of Economic Research, Cambridge, MAGoogle Scholar
  51. Helpman E, Krugman PR (1985) Market structure and foreign trade: increasing returns, imperfect competition, and the international economy. The MIT press, CambridgeGoogle Scholar
  52. Helpman E, Melitz MJ, Yeaple SR (2003) Export versus FDI with heterogeneous firms. Am Econ Rev 94(1):300–316CrossRefGoogle Scholar
  53. Horstmann I, Markusen JR (1992) Endogenous market structures in international trade. J Int Econ 20:225–247CrossRefGoogle Scholar
  54. Jeon Y (1992) The determinants of Korean foreign direct investment in manufacturing industries. Weltwirrtschaftliches Archiv 128(3):527–542CrossRefGoogle Scholar
  55. Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Control 12:231–254CrossRefGoogle Scholar
  56. Jones S (2006) Infrastructure challenges in East and South Asia. IDS bull 37(3):28–44CrossRefGoogle Scholar
  57. Joshi V, Little IMD (1994) India: macroeconomics and political economy 1964–1991. The World Bank, Washinton, DCGoogle Scholar
  58. Khan K, Leng K (1997) Foreign direct investment, exports and economic growth. Singap Econ Rev 42(2):40–60Google Scholar
  59. Kojima K (1982) A macroeconomic approach to foreign direct investment. Hitosubashi J Econ 14(1):1–21Google Scholar
  60. Kokko A, Zejan M, Tansini R (2001) Trade regimes and spillover effects of FDI: evidence from Uruguay. Weltwirtschaftliches Archiv 137:124–149CrossRefGoogle Scholar
  61. Krueger AO (1975) Foreign trade regimes and economic development: Turkey. National Bureau of Economic Research, New York, pp 271–339Google Scholar
  62. Krueger AO (1997) Trade policy and economic development: how we learn. Am Econ Rev 87(1):1–22Google Scholar
  63. Krueger A (1998) Why trade liberalisation is good for growth. Econ J 108(450):1513–1522CrossRefGoogle Scholar
  64. Krugman PR (ed) (1986) Strategic trade policy and the new international economics. MIT Press, Cambridge, MAGoogle Scholar
  65. 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 DelhiGoogle Scholar
  66. Kumar N, Siddharthan NS (1994) Technology, firm size, and export behavior in developing countries: the case of Indian enterprises. J Dev Stud 31(2):289–309CrossRefGoogle Scholar
  67. Lall S (1999) India’s manufactured exports: comparative structure and prospects. World Dev 27(10):1769–1786CrossRefGoogle Scholar
  68. Liu X, Wang C, Wei Y (2001) Causal links between foreign direct investment and trade in China. China Econ Rev 12(2):190–202CrossRefGoogle Scholar
  69. Liu XH, Burridge P, Sinclair PJN (2002) Relations between economic growth. FDI and trade: evidence from China. Appl Econ 34:1433–1440CrossRefGoogle Scholar
  70. Markusen JR (1983) Factor movements and commodity trade as complements. J Int Econ 13(3):341–356CrossRefGoogle Scholar
  71. Markusen JR (1995) The boundaries of multinational enterprises and the theory of international trade. J Econ Perspect 9(2):169–189CrossRefGoogle Scholar
  72. Markusen JR, Venables AJ (1998) Multinational firms and the new trade theory. J Int Econ 46(2):183–203CrossRefGoogle Scholar
  73. Metwally MM (2004) Impact of EU FDI on economic growth in middle eastern countries. Eur Bus Rev 16:381–389CrossRefGoogle Scholar
  74. Mundell RA (1957) International trade and factor mobility. Am Econ Rev 47(3):321–335Google Scholar
  75. 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):1467–1477CrossRefGoogle Scholar
  76. O’Sullivan PJ (1993) An assessment of Ireland’s export-led growth strategy via foreign direct investment: 1960–80. Weltwirtschaftliches Archiv 129:139–158CrossRefGoogle Scholar
  77. Pain N, Wakelin K (1998) Export performance and the role of foreign direct investment. Manch Sch Econ Soc Stud 66(3):62–89CrossRefGoogle Scholar
  78. Pacheco-López P (2005) Foreign direct investment, exports and imports in Mexico. World Economy 28(8):1157–1172CrossRefGoogle Scholar
  79. Parida P, Sahoo P (2007) Export-led growth hypothesis in South Asia: a panel cointegration analysis. Int Econ J, Rutledge 21(2):155–175Google Scholar
  80. Pesaran M (2007) A simple panel unit root test in the presence of cross-section dependence. J Appl Econom 22:265–312CrossRefGoogle Scholar
  81. Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econom 16:289–326CrossRefGoogle Scholar
  82. Pradhan JP, Abraham V (2005) Attracting export-oriented FDI: can India win the race? Working paper, no.156. Gujarat Institute of Development Research, AhmedabadGoogle Scholar
  83. Rana PB, Dowling JM (1990) Foreign capital and Asian economic growth. Asian Dev Rev 8(2):77–102Google Scholar
  84. Riedel J (1993) Vietnam: on the trail of the tigers. World Econ 16(4):401–422CrossRefGoogle Scholar
  85. Ruane F, Sutherland M (2004) Ownership and export characteristics of Irish manufacturing performance, IIIS discussion paper, 32, DublinGoogle Scholar
  86. Sahoo P (2004a) FDI and technology exports in India. ICFAI J Appl Econ 3(3):25–36Google Scholar
  87. Sahoo P (2004b) Fiscal federalism in India: a review. Asian Econ Rev 48(4):25–36Google Scholar
  88. Sahoo P, Dash RK (2012) Economic growth in South Asia: role of infrastructure. J Int Trade Econ Dev 21(2):217–252Google Scholar
  89. 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. CGoogle Scholar
  90. Sharma K (2003) Factors determining India’s export performance. J Asian Econ 14(3):435–446CrossRefGoogle Scholar
  91. 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, DelhiGoogle Scholar
  92. Sun H (2001) Foreign direct investment and regional export performance in China. J Reg Sci 41(2):317–336CrossRefGoogle Scholar
  93. Sun S (2012) The role of FDI in domestic exporting: evidence from China. J Asian Econ 23(4):434–441CrossRefGoogle Scholar
  94. 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):4–16CrossRefGoogle Scholar
  95. UNCTAD (1996) World investment report 1996. United Nations, GenevaGoogle Scholar
  96. UNCTAD (1999) Trends in international investment agreements: an overview. United Nations Publication, New York, Sales No. E.99.11.D.23Google Scholar
  97. UNCTAD (2002) World Investment Report, annual. UN Publications, GenevaGoogle Scholar
  98. UNCTAD (2003a) World investment report. United Nations, GenevaGoogle Scholar
  99. UNCTAD (2003b) World investment report. United Nations Conference on Trade and Development, GenevaGoogle Scholar
  100. UNCTAD (2005) World investment report. United Nations Conference on Trade and Development, GenevaGoogle Scholar
  101. Vernon R (1966) International investment and international trade in the product cycle. Q J Econ 80:190–207CrossRefGoogle Scholar
  102. 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, CanberraGoogle Scholar
  103. Westerlund J (2007) Testing for error correction in panel data. Oxford Bull Econ Stat 69:709–748CrossRefGoogle Scholar
  104. World Bank (1993) World development report 1993. Oxford University Press for the World Bank, New YorkCrossRefGoogle Scholar
  105. World bank (2011) World development indicator, 2011. World Bank, Washington, DCGoogle Scholar
  106. World Development Indicator (2012) World Bank, Washington, DCGoogle Scholar
  107. 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, HelsinkiGoogle Scholar
  108. Xuan NT, Xing Y (2008) Foreign direct investment and exports: the experience of Vietnam. Econ Trans 16(2):183–197CrossRefGoogle Scholar
  109. Zhang KH (2006) How does foreign direct investment affect economic growth in China? Econ Transit 9(3):679–693CrossRefGoogle Scholar
  110. Zhang Q, Felmingham B (2001) The relationship between inward direct foreign investment and China’s provincial export trade. China Econ Rev 12:82–99CrossRefGoogle Scholar
  111. Zhang KH, Song S (2000) Promoting exports: the role of inward FDI in China. China Econ Rev 11:385–396CrossRefGoogle Scholar

Copyright information

© Springer India 2014

Authors and Affiliations

  • Pravakar Sahoo
    • 1
  • Geethanjali Nataraj
    • 2
  • Ranjan Kumar Dash
    • 3
  1. 1.Institute of Economic Growth (IEG)Delhi University EnclaveDelhiIndia
  2. 2.Observer Research Foundation (ORF)DelhiIndia
  3. 3.Indian Council for Research on International Economic Relations (ICRIER)DelhiIndia

Personalised recommendations