Impact of trade openness and inflation on FDI in India: ARDL Approach

Abstract

Foreign Direct Investment (FDI) and trade are commonly considered as important economic indicators. In this globalised era, FDIs is among the best medium to bring the external finance into the country. This study explores the influence of inflation and trade openness on FDI in India during the period 1980-2020 using the time series methods. For this research study, Foreign Direct Investment (FDI) is the dependent variable, whereas Inflation and Trade Openness are independent variables for investigating the causal and long-run relationship among the variables taken in India. In order to fulfil the aforementioned objective, Auto Regressive Distributed Lag (ARDL) Bounds test approach has been used. The findings imply that FDI inflows and trade openness have a long-term association. Further, it has also been found that trade openness shows a positive statistically significant impact on foreign direct investment, indicating that higher openness, will attract greater level of FDI in the country (India). Although trade openness and inflation are both positively associated with FDI inflows, inflation is statistically insignificant.

Subject Classification:

• 03D45

Keywords:

• Foreign direct investment
• Inflation
• Trade openness
• Long run relationship