Does Trade Openness Benefit FDI Inflows into India?: Time-series Analysis on Five Major Indian FDI Sectors

Under the “New Southern Policy” of the current Korean government, India became an important trade and economic cooperation partner towards promoting better economic cooperation between the two countries. This study investigates the relationship between trade openness and FDI inflows in five major FDI sectors of India. Using CEIC data from 2007 Q1 to 2017 Q3, the study estimates six time-series ARDL models and Granger causality tests with different lags. Among five major FDI sectors, the ARDL estimation results show that trade openness has a significantly positive impact on the automobile and service FDI sector. These two sectors have common features which are efficiency seeking and horizontal FDI flows. Therefore, to ensure the success of the New Southern Policy, a strong channel consisting of an efficiency seeking sector and horizontal FDI flows should be prepared. Granger causality test results show time gaps between the impact of trade openness and FDI flows in India. These results reveal that it takes time for investments and their impact to manifest on international trade in India. Therefore, the Korean government should be patient in obtaining positive results in terms of trading and investing in India through the New Southern Policy.