An empirical analysis among foreign direct investment, trade openness and economic growth: evidence from the Indian economy

Abstract

Purpose

This study examines the long-term and causal relationship among foreign direct investment (FDI) inflows, trade openness and economic growth from India.

Design/methodology/approach

This study has used annual time series data from the period 1985–2018 and applied the Johansen cointegration and vector autoregression (VAR) model.

Findings

The results of Johansen's cointegration confirm no long-term relationship among all the above three variables. Further, the results of VAR Granger causality indicate that FDI causes economic growth and economic growth causes FDI, which confirms the bi-directional causality. In contrast, this study found that there is no bi-directional causality between trade openness and economic growth.

Social implications

Through this study, the government could take the decisions related to foreign investment after adopting more trade openness because the study results revealed that if India follows more trade openness, then how FDI will flow (upward and downward). With impulse analysis, researchers, government and policymakers take the decision-related FDI inflows for the forthcoming ten years after 2018.

Originality/value

This study has found the most exciting results from the impulse functions of FDI inflows, trade openness and economic growth, which showed the situation of these three variables as increase and decrease in the forthcoming ten years.

Citation

Kumari, R., Shabbir, M.S., Saleem, S., Yahya Khan, G., Abbasi, B.A. and Lopez, L.B. (2023), "An empirical analysis among foreign direct investment, trade openness and economic growth: evidence from the Indian economy", South Asian Journal of Business Studies, Vol. 12 No. 1, pp. 127-149. https://doi.org/10.1108/SAJBS-06-2020-0199