Relationship Between FDI Inflows and Export: The Case of India

Capital flows have become a prerequisite for accelerating the pace of growth and development of a developing country, and practically all developing countries have been working hard to attract additional capital flows. Furthermore, these countries have correctly recognized the necessity of entrusting a significant role to the private sector. Capital flows to developing countries began to pick up steam in the early 1980s, and by the end of the decade, there had been a massive rise in the number of capital flows to these countries. Though the Indian government has traditionally welcomed foreign investment with certain constraints, the government’s foreign investment policy has experienced significant changes since independence. The role of trade policy on economic growth has been the focus of considerable academic effort. Openness, namely, the sum of exports and imports to Gross Domestic Product (GDP), has been considered one of the main determinants of economic growth. Export expansion can increase productivity, offering greater economies of scale. Against this background, this study investigates the relationship between Foreign Direct Investment (FDI) and trade for India over the period 2000-2022. The result of regression analysis showed that there is a relationship between the examined variables.


Introduction
Foreign Direct Investment (FDI) is considered a major source of non-debt financial resources for economic development. FDI flows into India have grown consistently since liberalization and are an important component of foreign capital since FDI infuses long-term sustainable capital in the economy and contributes towards technology transfer, development of strategic sectors, greater innovation, competition and employment creation amongst other benefits. Therefore, it is the intent and objective of the Government of India to attract and promote FDI to supplement domestic capital, technology and skills for accelerated economic growth and development (GOI, 2020).
According to Department for Promotion of Industry and Internal Trade (DPIIT) data, in 2014-15, the FDI inflow in India stood at a mere $45.15 billion, which increased to $60.22 billion in 2016-17 and further to the highest-ever FDI inflow of $83.57 billion during 2021-22. Total FDI inflows in India in the last 22 years (April 2000-March 2022 are 847 billion while the total FDI inflows received in the last 8 years (April 2014 -March 2022) was $523 billion which amounts to nearly 40 per cent of total FDI inflow in the last 22 years.

Review of Literature
Various governments have reacted positively and comprehensively to globalization. Significant adjustments are made in the investment policies to make them more adaptive, acceptable and sustainable. This has prompted several researchers around the world to examine investment policies particularly FDI in both developed and developing countries. Various researchers have been able to establish a positive relationship between FDI and economic growth and development for developing economies, including Carkovic & Levine (2002), Alfaro (2003), Johnson (2006), Lyroudi et al. (2004), Sapienza (2009), Melynyl et al. (2014. The role of trade policy on economic growth has been the focus of considerable academic effort. Openness, namely, the sum of exports and imports to Gross Domestic Product (GDP), has been considered one of the main determinants of economic growth. Export expansion can increase productivity, offering greater economies of scale. Exports are likely to alleviate foreign exchange constraints and can thereby provide greater access to international markets (Melina Dritsaki, et al, 2004). Khan and Leng (1997) examine the interactions among inward -FDI, exports and economic growth for Singapore, Taiwan and South Korea, at the aggregate level during the period from 1965 to 1995 by using the Granger causality test. They claim that there is no evidence to support the causal relationship between FDI and Exports in Taiwan and South Korea. Moreover, a one-way causal relationship which flows from exports to inward FDI is found in Singapore. Liu, et al, (2002) investigated the causal relationship between inward FDI, trade and economic growth in China at the aggregate level from 1981 to 1997 quarterly. A two-way causal relationship between inward FDI and exports is found. Alici and Ucal (2003) investigate the causal links among inward FDI, exports and economic growth in the Turkish economy from 1987 to 2002 on quarterly bases. The linkage of FDI -led export growth is not found in Turkey. Melina Dritsaki, et al (2004), investigates the relationship between Trade, Foreign Direct Investment (FDI) and economic growth in Greece over the period 1960-2002. The cointegration analysis suggested that there is a long-run equilibrium relationship among the above variables.
The results of the Granger causality test showed that there is a causal relationship between economic growth, trade and FDI. Pacheco -Lopez (2005) demonstrates the causal relationship between inward FDI and Export performance in Mexico by using the Granger causality test. The result indicates that there is bi-directional causality between inward FDI and export performance. Abdel Rahman (2007) using the causality test found that FDI does not Granger cause export growth in the Kingdom of Saudi Arabia but export growth Granger cause FDI growth. Njong (2008) examined the association between FDI and export in the case of Cameroon. Using the data for the period 1980-2003, he found a positive impact of FDI on export through an increase in supply capacity and spillover effects.
According to Shikha Singh (2019), the Indian economy is one of the world's top emerging markets. Five years ago it was considered part of the fragile five, but no longer. Since 2014, it has emerged as the top foreign destination in the world with a significant rise in FDI. With the introduction of a New Economic Policy in 1991, India began the process of soliciting foreign investment, and during the 2000s, India reached unprecedented new heights in terms of FDI. Programs such as Make in India are aimed at transforming the economy and transforming India into a global manufacturing hub. Sai Rani and Sourav Kumar Ghosh (2020) indicated varying trends of FDI inflows in India in recent years which is in line with the world economy but is generally on the rising side. The study also reveals that Mauritius has been the top investing nation in India and among all the sectors, the service sector attracts the maximum FDI from various nations throughout the study.

Significance of the Study
Many researchers have indicated that in an open economy, technology and trade, especially through exports and imports promote economic growth However, growth also has effects on trade. The observations on the FDI -growth nexus and Trade -growth nexus lead us to examine the third side of triangular relations; the FDI -Trade nexus. Export expansion can increase productivity, offering greater economies of scale. Exports are likely to alleviate foreign exchange constraints and can thereby provide greater access to international markets. Many early studies of the links between exports and growth confirm a statistical relationship between export growth and output growth. Similarly, the empirical evidence on the causal relationships between FDI investment and trade is equally contradictory, with results ranging from unidirectional causality, bidirectional causality, or even no causality between FDI and trade.

The Objective of the Study
The main objectives of this study are: 1. To study the trends of FDI inflows in India. 2. To identify the country-wise, sector-wise and state-wise flow of FDI into India. 3. To ascertain the relationship between FDI inflow and trade in India.

Research Methodology
This research is based on secondary sources. It has been collected from the sources such as the Department for Promotion of Industry and Internal Trade, Annual Reports of the Reserve Bank of India, UNCTAD, numerous journals, newspapers, and websites, among others.

Period of the Study
The main scope of this study is to evaluate the trends of FDI inflows into India and to study the country-wise flow of FDI and its sector-wise distribution in India. Therefore, the data have been collected for the period 2000-01 to 2020-22.

Limitations of the Study
The major limitations of this study are: (i) it is entirely based on the Indian economy only. (ii) this study is limited to only the last twenty-two financial years. So, the findings of this study reflect this period only.

Data Analysis Trends in FDI Inflows
As previously stated India's reported stock of FDI expanded significantly when the economy was opened up. Today, India is a part of the top 100 clubs  Table 1 showed that the change in reporting procedure, which included additional categories such as reinvested earnings from existing businesses, contributed significantly to the reported higher total inflows: 32.04 per cent from 2000-01 to 2004-05 and 20.59 per cent from 2015-16 to 2021-22. However, the fact of a substantial increase in inflows after 2005-06 cannot be denied, as reported equity inflows, which fluctuated between 2002-03 and 2003-04, managed to climb slowly at first before drastically increasing after 2005-06. FDI equity inflows were nearly three times higher in the ten years 2010-11 to 2019-20 than in the prior ten years 2000-01 to 2009-10. The significant shift in the immediate source country for FDI into India is another crucial component of the inflows (Table 2). While Mauritius' importance in routing foreign capital to India has long been recognized, the country's position as a source country has grown in recent years. The country contributed 28 per cent of total reported inflows between April 2000 and March 2022. Surprisingly, Singapore came in second, ahead of the UAE, Cyprus, and the Cayman Islands, to join the top ten home nations for FDI into India. A country must determine which of its sector receives the most FDI. Whether it's investing in modern and advanced technology-intensive sectors or assisting in the development of productive capabilities thereby crowding out domestic investments. Since 1991, the composition of FDI inflows has shifted dramatically. FDI has gradually shifted away from manufacturing and toward services. In addition, different industries have been opened to FDI at different times. Table 3 shows the rankings, names, and shares of FDI inflows for the top ten sectors, as reported by DPIIT data. The top three sectors that attracted the most investment inflows from 2000 to 2022 were the service industry (financial and non-financial), computer software and hardware, and telecommunications.    To examine the causal relationship between FDI and export growth in India, the present study has applied linear regression test analysis. The result of the linear regression test analysis has been shown in Table 6. The value of multiple R is 0.891125972, which indicates a fairly strong linear relationship between FDI inflow and trade in India.

Conclusion
India remains a prominent international investment destination due to its inherent advantages -a huge market with a relatively younger population, democratic setup, investor-friendly reforms, increased pace of urbanization, steady rise in rural consumption levels, and a sustained increase in disposable per capita incomes. The paper tries to examine the relationship between FDI inflows and trade in India. The study finds that there is a fairly strong linear relationship between FDI inflow and trade in India.