Title: Does causality between FDI and trade exist: evidence from South Asia?

Authors: Ranjan Kumar Dash, Chandan Sharma

Addresses: National Council of Applied Economic Research (NCAER), 11, Indraprastha Estate, New Delhi 110002, India. ' Economics and Business Policy, FORE School of Management, B-18, Qutab Institutional Area, New Delhi 110016, India

Abstract: This study has twin objectives: first, to investigate the interrelationship between export and Foreign Direct Investment (FDI). Second, we test the causal linkage with import and FDI. For this purpose, we select four major South Asian countries, namely India, Bangladesh, Sri Lanka and Pakistan. The study is based on Granger non-causality test of Toda and Yamamoto (1995) for the period 1990Q1-2007Q4. The evidence shows that there is a bi-directional causality between FDI and Trade. Specifically, our analysis indicates for interrelations between export and FDI as well as between import and FDI in the region. This may reflect the fact that import has played a crucial role in export growth in South Asia. Overall, the results indicate a complementary relationship between FDI and Trade.

Keywords: FDI; foreign direct investment; international trade; causality; South Asia; exports; causal linkages; imports; India; Bangladesh; Sri Lanka; Pakistan; Clive Granger; non-causality test; Toda; Yamamoto; bi-directional causality; export growth; globalisation; global markets.

DOI: 10.1504/IJTGM.2010.035757

International Journal of Trade and Global Markets, 2010 Vol.3 No.4, pp.390 - 413

Published online: 03 Oct 2010 *

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