Eurasian Journal of Business and Economics 2013, 6

(11), 75-91.
Causal Links between Foreign Direct
Investments and Trade: A Comparative
Study of India and
Cina
!enu S"A!#A$% #andeep &A'!$$
Abstract
Global economic environment is changing rapidly during the last two
decades. This change is reflected in widening and intensifying international
linkages in trade and FDI. Various countries are now favouring economic
reforms for attaining rapid and sustained growth. The scope for transnational
production has expended due to reduction of the barriers to international
trade and the various regional integration agreements between the different
countries. This paper examines the causal relationships between FDI and
trade i.e !xports and Imports" in India and #hina. Granger causality test
has been employed to examine the causal relation between FDI and trade
by using the data over the period of $%&'()*$$.The results for #hina show
unidirectional causality running from FDI to imports and FDI to exports+
however+ there exist bidirectional causality between imports and exports.
India gives the results which are not similar to #hina where bidirectional
causality between FDI and imports, FDI and exports, and exports and
imports have been found.
Keywords- #ausality !xports+ FDI+ Imports
JEL Code Classification: F)$+ F$*+ F)..
*
ssis!an! "rofessor, #.$.%.&. 'olle(e, $ud)iana. E-mail* renu+ra,200-.)o!mail.com
**
ssocia!e "rofessor, /uru 0ana1 &e2 3ni2ersi!4, mri!sar. E-mail*
m1aur02.4)aoo.co.in
5enu %657 8 7andee9 #35
() Introduction
:)e im9or!ance of !)e causal rela!ions)i9 ;e!<een in<ard =&> and e?9or!s is
cen!ral !o de2elo9men! and 9lannin( s!ra!e(ies of !)e coun!ries. >f =&>
(=orei(n direc! in2es!men!s) dis9laces e?9or! !rade of local firms of !)e )os!
coun!r4, !)en i! <ill ;e )armful for !)e domes!ic indus!r4 of !)e in2es!in(
coun!r4. @n !)e con!rar4, if !rade and =&> com9lemen!s !o eac) o!)er !)en i!
mi()! lead !o (rea!er com9e!i!i2eness of !)e forei(n mar1e! and !)is is
;eneficial !o e?9or!s from )os! coun!r4 and !)erefore !o i!s indus!ries
(:adesse and 54an, 2001).
s no!ed ;4 !)e 3ni!ed 0a!ions 'onference on :rade and &e2elo9men!
(1996), conce9!ual models of forei(n direc! in2es!men! (=&>) and
in!erna!ional !rade )a2e !radi!ionall4 ;een de2elo9ed se9ara!el4. :)e
in!e(ra!ion of =&> and !rade !)eories is s!ill a! i!s infan! s!a(e. s a resul!,
!)ou() !)e im9or!ance of =&> or in!erna!ional !rade as indi2idual 2aria;les in
economic (ro<!) )as ;een <idel4 documen!ed, !)eir 9ossi;le lin1a(es are
rela!i2el4 unders!udied. n unders!andin( of !)ese lin1a(es <ill )el9
(o2ernmen!s !o )armoniAe !)eir =&> and !rade 9olicies for (ro<!) and
de2elo9men!.
>n !)e in!erna!ional economics and ;usiness li!era!ure, !)e follo<in( !<o
as9ec!s of 9ossi;le lin1a(es ;e!<een =&> and in!erna!ional !rade are
discussed*
(1) B)e!)er =&> is a %u;s!i!u!e for, or a 'om9lemen! !o, >n!erna!ional
:rade
(2) B)e!)er =&> 'auses >n!erna!ional :rade or Cice-Cersa.
s for !)e firs! as9ec!, !)e 6ec1sc)er @)linD%amuelson model su((es!s !)a!
in!erna!ional !rade can su;s!i!u!e for in!erna!ional mo2emen! of fac!ors of
9roduc!ion includin( =&>. :)is model im9lies !)a! in!erna!ional commodi!4
!rade in2ol2es an indirec! e?c)an(e of fac!ors ;e!<een coun!ries. =or
ins!ance, ;4 e?9or!in( ca9i!al-in!ensi2e commodi!ies in e?c)an(e for la;our-
in!ensi2e commodi!ies, !)e ca9i!al-a;undan! coun!r4 indirec!l4 e?9or!s a ne!
amoun! of ca9i!al in e?c)an(e for a ne! amoun! of la;our. E2en under !)e
assum9!ion !)a! fac!ors are 9erfec!l4 immo;ile ;e!<een coun!ries, fac!ors do
mi(ra!e ;e!<een coun!ries indirec!l4 !)rou() e?9or!s and im9or!s of
commodi!ies. >n!erna!ional !rade and !)e in!erna!ional mo;ili!4 of fac!ors of
9roduc!ion, <)ic) includes =&>, are su;s!i!u!es ra!)er !)an com9limen!s for
eac) o!)er <)ere !)ere are ;arriers !o !rade ($iu e! al. 2002). E?9or! (ro<!)
and in<ard =&> ma4 )a2e a reci9rocal causa!i2e rela!ions)i9. >n !)a! case,
!)ere is no e2iden! direc!ion of causa!ion ;e!<een e?9or! (ro<!) and =&>,
and !)en al!erna!i2e s!ra!e(ies for !)e encoura(emen! of =&> or e?9or!
9romo!ion are reEuired for s!ruc!ural !ransforma!ion and (ro<!) of !)e
econom4 (F)an( and =elmin()am, 2001).
f!er learnin( more a;ou! !)e economic, 9oli!ical, and social condi!ions and
(ainin( more e?9erience, )ome coun!r4 firms ma4 es!a;lis) 9roduc!ion
su;sidiaries in !)e forei(n mar1e!. 6o<e2er, forei(n su;sidiaries in )os!
coun!r4 ma4 e2en!uall4 ;e(in !o e?9or!. :)us, !)ere can ;e a !<o-<a4 causal
lin1 ;e!<een !rade and =&> i.e. !rade <ill firs! cause =&> and =&> ma4
e2en!uall4 cause !rade. :)e causal
"a(e G 76 EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
rela!ions)i9 ;e!<een !rade and =&> is com9lica!ed and de9ends lar(el4 on
!)e !49es of !rade and =&> ;ein( considered. >! is ;asicall4 coun!r4 s9ecific.
>n ;rief, !)e >ndian and ')inese (o2ernmen!s and de2elo9men! a(encies
mus! 1no< a;ou! !)e success of 9as! 9olic4 and fu!ure de2elo9men!
s!ra!e(ies of !)eir coun!r4. :)is necessi!a!es no! onl4 !o 9a4 a!!en!ion !o<ard
findin( ou! !)e causal lin1s ;e!<een =&> and :rade in >ndia and ')ina, ;u!
!)e com9arison of >ndia and ')ina on !)e ;asis for !es!in( for causali!4 for
=&>, e?9or!s and im9or!s <i!) recen! da!a is e?!remel4 needed. :)is
su((es!s !)e im9or!ance of em9irical in2es!i(a!ions in assessin( =&>D!rade
rela!ions)i9s for !)ese coun!ries.
:)e s!ud4 )as ;een classified in!o 6 sec!ions. :)e firs! sec!ion 9resen!s !)e
direc! and indirec! effec! of =&> on )os! coun!r4 e?9or!s. %ec!ion 2 re2ie<s
!)e e?is!in( s!udies on !)e causal rela!ions)i9s ;e!<een =&> and !rade.
:rade 9erformance of >ndia and ')ina durin( !)e 9eriod 19-0-2011 )as
;een e?9lained in sec!ion 3. %ec!ion I descri;es da!a ;ase and me!)odolo(4
and !)e findin(s of !)e 9a9er )as ;een discussed in sec!ion 5. %ummar4,
limi!a!ions and su((es!ions )a2e ;een e?9lained in sec!ion 6. %co9e for
fur!)er researc) )as also ;een discussed under !)is sec!ion.
*) +ffect of Foreign Direct Investments on "ost Country
+,ports
:ransna!ional cor9ora!ions (:0'Js) )a2e ;ecome a common fea!ure of mos!
of de2elo9in( coun!ries in !)e <orld. :0'Js are lar(e cor9ora!ions <)ic)
)a2e !)eir o9era!ions in a num;er of coun!ries (')o9ra, 2003). :)ese are
!)e mos! 9o<erful economic and 9oli!ical en!i!ies in !)e <orld cor9ora!ions
<)ic) o9era!e in more !)an one coun!r4 or na!ion a! a !ime (#arliner, 1997).
)os! coun!r4Js e?9or!s ma4 e?9and due !o forei(n in2es!men!s as :0's
)as com9ara!i2e ad2an!a(es of assessin( <orld mar1e!s !)en !)e local
firms. :)ere ma4 ;e direc! and indirec! effec!s of =&> (=orei(n direc!
in2es!men!s) on e?9or!s of )os! coun!ries. &irec! effec!s refer !o e?9or!s ;4
forei(n su;sidiaries !)emsel2es. :)e im9ac! of =&> on e?9or! ac!i2i!ies of
local firms accoun!s for !)eir indirec! effec!s. ;rief descri9!ion of !)ese
effec!s is as under*
*)() Direct +ffects of FDI on "ost +,ports
>n a discussion of !)e direc! effec!s of =&> on )os! coun!r4 e?9or!s, i! is
con2enien! !o di2ide e?9or! ac!i2i!ies of forei(n affilia!es in!o !)ree ca!e(ories
accordin( !o !)eir 9roduc!ion c)arac!eris!ics*
1- Local !aw #aterials -rocessing: >n !)e 9rocessin( of locall4 9roduced
ra< ma!erials, forei(n su;sidiaries in )os! coun!ries ma4 )a2e ;e!!er e?9or!
9o!en!ial !)an indi(enous firms ;ecause of !)eir ;usiness con!ac!s a;road,
mar1e!in( s1ills and su9erior !ec)nolo(4, ;o!) in 9roduc! and 9rocesses.
2- .ew labour/intensive Final -roduct +,ports: :)ere are man4
o99or!uni!ies for )os! coun!ries !o ;ecome si(nifican! e?9or!ers of ne<
la;our-in!ensi2e final
EJBE 2013, 6 (11) "a(e G 77
5enu %657 8 7andee9 #35
9roduc!s, suc) as !e?!iles and o!)er consumer (oods. =irms in de2elo9in(
coun!ries see1in( !o e?9and !)eir e?9or!s !o <orld mar1e!s, )o<e2er, face
immense difficul!ies in se!!in( u9 a dis!ri;u!ion ne!<or1, c)an(es in
consumer !as!es, and ;uildin( u9 a ne< 9roduc! ima(e. >n man4 cases, !)e
desi(n, 9ac1a(in(, dis!ri;u!ion, and ser2icin( of !)e 9roduc!s are as
im9or!an! as ;ein( a;le !o 9roduce !)em a!, or ;elo<, rulin( 9rices in <orld
mar1e!s. :)e lac1 of suc) s1ills cons!i!u!es a 1e4 ;arrier !o en!r4 in!o !)e
<orld mar1e!s for de2elo9in( coun!r4Js e?9or!ers.
- Labour/intensive -rocesses and Component Speciali0ation witin
1ertically Integrated International Industries: E?9or!s of la;our-in!ensi2e
(oods <i!)in 2er!icall4 in!e(ra!ed 9roduc!ion o;2iousl4 de9end on !)e
9ar!ici9a!ion of :0's. /enerall4, !)ese e?9or!s are !)ou()! of as in!ra-firm
!rade, ;u! a (rea! 9ar! of !)em are armKs-len(!) !ransac!ions ;e!<een :0's
and indi(enous )os! coun!r4 firms. :)is !49e of 9roduc!ion in (eneral is
associa!ed <i!) 9rocessin( com9onen!s and assem;lin( in <)ic) )os!
coun!ries im9or! unfinis)ed and in!ermedia!e (oods.
*)*) Indirect +ffects of FDI on "ost +,ports
=orei(n affilia!es can also affec! )os! coun!r4 manufac!urin( e?9or!s in
se2eral indirec! <a4s. =or ins!ance,
1- Increase in +,ports of Local Firms: $ocal firms ma4 increase !)eir
e?9or!s ;4 o;ser2in( !)e e?9or! ac!i2i!ies of :0's and ;4 ma1in( use of !)e
infras!ruc!ure of !rans9or!, communica!ions, and financial ser2ices !)a!
de2elo9 !o su99or! !)ose ac!i2i!ies.
2- Impact of FDI on te Competitiveness of "ost Country Firms:
no!)er indirec! effec! in2ol2es !)e influence of =&> on !)e com9e!i!i2eness
of )os! coun!r4 firms and diffusion of ne< !ec)nolo(ies. :0's )a2e firm-
s9ecific ad2an!a(es !)a! ena;le !)em !o com9e!e <i!) local firms <i!) ;e!!er
1no<led(e of consumers, fac!or mar1e!s, and !)e fa2or of local
(o2ernmen!s. :)ese firm-s9ecific ad2an!a(es in 9roduc!-9rocess !ec)nolo(4,
mana(emen!, and mar1e!in( com9e!ence re9resen! some!)in( more !)an
sim9le in9u! of ca9i!al in!o a )os! coun!r4 and ma4 influence ;o!) !)e
s!ruc!ure of !)e )os! econom4 and 9erformance of )os! coun!r4 firms. B4
!a1in( !)eir firm-s9ecific asse!s a;road, :0's ma4 increase com9e!i!ion in
)os! coun!r4 mar1e!s and in !)a! <a4, force e?is!in( firms !o ado9! more
efficien! me!)ods. =&> !)us ma4 im9ro2e !)e efficienc4 of )os! coun!r4 firms
!)rou() !)e diffusion of ne< !ec)nolo(ies and mana(emen! 9rac!ices in )os!
coun!ries.
3- Linkage Structure between Foreign and Local Firms: :)e !)ird
indirec! effec! is rela!ed !o !)e lin1a(e s!ruc!ure ;e!<een forei(n and local
firms. >f e?9or!-orien!ed forei(n su;sidiaries increase !)e 9urc)ase of in9u!s
from !)e local firms as !)e su;sidiar4 ma!ures, !)e )os! coun!r4Ks !rade
;alance <ill im9ro2e. =ur!)ermore, suc) rela!ions)i9s ;e!<een a forei(n
su;sidiar4 and i!s local su99liers are also im9or!an! 9o!en!ial sources for
!ec)nolo(4 s9illo2ers, <)ic) ma4 s!imula!e
"a(e G 7- EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
9roduc!i2i!4 im9ro2emen!s and !)e com9e!i!i2eness of )os! coun!r4 firms.
E?9or! 9romo!ion !)rou() =&> )as ;een one of !)e 1e4 reasons for !)e
(o2ernmen!Ks desire !o a!!rac! =&>. =&> can )el9 !o c)annel ca9i!al in!o
indus!ries !)a! )a2e !)e 9o!en!ial !o com9e!e in!erna!ionall4, and !)e (lo;al
lin1a(es of :0's can facili!a!e !)eir access !o forei(n mar1e!s. >n addi!ion !o
e?9or!s !)a! are (enera!ed direc!l4 ;4 forei(n affilia!es, =&> can also 9romo!e
e?9or!s ;4 framin( 9ro9er mar1e!in( s!ra!e(ies, ado9!in( o9!imal me!)ods,
follo<in( sui!a;le 9rocedures, and c)annels of dis!ri;u!ion (F)an( and %on(,
2000).
:)ere is an in!ense com9e!i!ion amon( na!ions around !)e <orld !o a!!rac!
e?9or!-orien!ed =&> (E=&>). :)is is 9ar!icularl4 !rue amon( de2elo9in(
coun!ries <)ere E=&> ac!s as ins!rumen!al !ool for s!ren(!)enin( !)eir e?9or!
com9e!i!i2eness 9ar!icularl4 in !)e 1no<led(e-;ased indus!ries. :)ere are
man4 reasons for !)is com9e!i!ion. >n (eneral E=&> ;rin(s in a L;undle of
in!an(i;le asse!sJ suc) as ne< !ec)nolo(4, s1ill, mar1e!in( 1no<-)o< and
mana(emen! <)ic) are rela!i2el4 scarce in de2elo9in( coun!ries ;u! are
indis9ensa;le for e?9or! 9erformance. :radi!ionall4 >ndia )as no! ;een a
fa2ora;le des!ina!ion for E=&> as com9ared !o o!)er coun!ries suc) as
')ina, %in(a9ore or 7ala4sia. E2en !)e coun!ries suc) as r(en!ina, BraAil,
'os!a 5ica, 7e?ico, "eru and :ai<an )a2e ;een found !o a!!rac! E=&>
considera;l4 )i()er as com9ared !o >ndia. :)ere is no dou;! in !)e fac! !)a!
coun!ries <i!) rela!i2el4 lo<-cos! la;our )a2in( a2aila;ili!4 of (ood
infras!ruc!ure and ra< ma!erials alon( <i!) ou!<ard loo1in( 9olic4 re(ime
!ends !o a!!rac! more E=&>. :)e siAe of domes!ic mar1e! )o<e2er is found !o
)a2e a dam9enin( effec! on !)e e?9or! orien!a!ed =&> ("rad)an and
;ra)am, 200I).
2) !eview of +,isting Studies
:)is sec!ion deals <i!) !)e e2alua!in( li!era!ure on s)or!-run and lon(-run
causali!4 ;e!<een =&> (=orei(n direc! in2es!men!s) and !rade, <)ic) ma4 ;e
)el9ful for 9olic4 ma1ers !o de2ice ;e!!er !rade 9olicies in !)e )os! coun!ries
af!er )a2in( !)e idea a;ou! !)is causa!ion. Carious s!udies s)o<in( !)e
causal rela!ion ;e!<een =&> and !rade )a2e ;een 9resen!ed in :a;le 1.
:)e rela!ions)i9 ;e!<een ou!<ard =&> and e?9or!s )as ;een em9iricall4
e?amined and !)e e?is!ence of lon(-run /ran(er-causali!4 from ou!<ard =&>
!o e?9or!s for !)e %9ain <as 9oin!ed ou! <)ic) )a2e im9or!an! 9olic4
im9lica!ions for !)e de2elo9men! 9lannin( and s!ra!e(ies (Ba,o and 7on!ero,
199I). :)e lin1a(es ;e!<een forei(n direc! in2es!men! and in!erna!ional
!rade for de2elo9in(, @E'& and indus!rialiAed coun!ries )as ;een
in2es!i(a!ed. 'om9lemen!ari!4 ;e!<een =&> and !rade <as found a! !)e
macro-economic le2el due !o s9illo2ers ;e!<een firms <i!)in indus!ries and
;e!<een indus!ries <i!)in !)e manufac!urin( sec!or. $in1a(es ;e!<een =&>
flo<s and !rade <ere s!ron(er in de2elo9in( !)an in indus!rialiAed coun!ries.
>n an era of ra9idl4 (ro<in( !rade in!e(ra!ion coun!ries canno! c)oose !)eir
ca9i!al accoun! 9olicies inde9enden!l4 of !)eir de(ree of o9enness !o !rade.
:)is no!ion also 9ro2ides a 9ar!ial mo!i2a!ion for !)e dee9 !rade and financial
EJBE 2013, 6 (11) "a(e G 79
5enu %657 8 7andee9 #35
li;eraliAa!ions under!a1en ;4 de2elo9in( coun!ries in recen! 4ears on
accoun! of !)e 9osi!i2e feed;ac1s ;e!<een !rade and =&> (iAenmana and
0o4, 2006M =on!a(ne and "a,o!M 2000M "an!ulu and "oon 2002).
Table: ( Causal !elationsip between FDI and Trade
Studie
s
Fo
nt
ag
ne
an
d-
a3o
t4*
55
56
Direction
7
a
#
o
n
t
e
r
o
4
(
8
8
9
6
of Causality
Sample
Si0e
S
p
a
ni
s

+
c
o
n
o
m
y
*(
:+
CD
Co
unt
rie
s
-eriod of
Study
(1977
-
(19-
I-
1992)
199
I)
:utward
-
FDI+,por
ts
FDITrade - -
FDITrade -
ImportsF
DIFD
- -
I+,ports
FDI+,por
ts - -
FDI+,por
ts
%ource* u!)or
com9u!a!ions
Liu et
al)
4*55(6
"
a
n
!
u
l
u

a
n
d
"
o
o
n

(
2
0
0
2
)
S
r
i
v
a
s
t
a
v
a
a
n
d
S
e
n
4
*
5
5
9
6
A
i0
e
n
m
a
n
a
a
n
d
.
o
y4
*
5
5
;6
Ame
d et
al)
4*55<6
Liu
an
d=
ra
am
4*5
5>6
I
?
b
al
e
t
al
)
4
*
5
(
5
6
Ci
na
*
8

C
o
u
n
t
r
i
e
s
r
e
s
p
e
c
t
i
v
e
l
y India
>(
Devel
oping
Count
ries
@
S
u
b
S
a

a
r
a
n
A
fr
i
c
a
n
+
c
o
n
o
m
i
e
s
@9
Count
ries
-a
ki
st
an
(19
-I-
(199
6-
(1991
- (19-2- (19-5- (1999-
(19
9--
199
-)
1999
) 2002) 199-) 2005) 2006)
200
9)
- - - - - - -
- - - - - -
- - - - - -
- - - - - -
- - -
- -

>ndica!es !)e e?is!ence
of causal rela!ions)i9
:)e causal rela!ions)i9
;e!<een forei(n direc!
in2es!men! and !rade in
')ina for !)e 9eriod
19-I-199- )as ;een
e2alua!ed. >! <as
concluded !)a! !)e
(ro<!) of ')ina im9or!s
causes !)e (ro<!) in
in<ard =&> from )ome
coun!r4, <)ic) in !urn
causes !)e (ro<!) of
e?9or!s from ')ina !o
)ome coun!r4 ($iu e! al.,
2001). %ri2as!a2a and
%en (200I) e?9lored !)e
causal rela!ions)i9
;e!<een =&> ne! inflo<s
and ser2ice e?9or!s in
!)e >ndian econom4 o2er
!)e 9eriod 1991 !o 2002.
:)e em9irical resul!s
s)o< !)e 9resence of
s)or!-run unidirec!ional
(ran(er causali!4 from
=&> !o %er2ices e?9or!s
in !)e
>ndian
econom
4 in !)e
9os!
li;eraliA
a!ion
9eriod.
:)is
anal4si
s
conclud
ed !)a!
=&> )as
9osi!i2e
l4
con!ri;u
!ed !o
!)e
(ro<!)
of
ser2ice
s
e?9or!s
in !)e
>ndian
econom
4 af!er ini!ia!ion
of economic
reforms in !)e
coun!r4.
)med e! al.
(2007)M $iu and
/ra)am
(200-)M >E;al e!
al. (2010)
assessed !)e
rela!ions)i9
;e!<een =&>
inflo<s,
e?9or!s and
economic
(ro<!) in !)e
fi2e %u;-
%a)aran
frican
economies
(/)ana,
#en4a, 0i(eria,
%ou!) frica
and Fam;ia),
:ai<an and
%ou!) #orea
and in
"a1is!an. :)e anal4sis
re2ealed !)e lon( run
rela!ions)i9 amon( !)e
fac!ors and found
;idirec!ional causali!4
;e!<een forei(n direc!
in2es!men! and e?9or!.
:)ese <ere !)e !<o
im9or!an! fac!ors
res9onsi;le for
en)ancin( economic
(ro<!) in an econom4. >!
<as su((es!ed !)a!
(o2ernmen! s)ould 9la4
a 9osi!i2e role in
9ro2idin( securi!4 !o !)e
in2es!ors around !)e
(lo;e.
>! )as ;een o;ser2ed
af!er re2ie<in( !)e
li!era!ure !)a! a num;er
of s!udies )a2e found
;idirec!ional causali!4
;e!<een =&> and !rade in
case of !)e de2elo9in(
"a(e G -0 EJBE
2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
coun!ries (iAenmana and 0o4, 2006M =on!a(ne and "a,o!, 2000) <)ile "an!ulu
and "oon, (2002) )a2e found uni-direc!ional rela!ions)i9s ;e!<een !)ese
2aria;les. =ur!)er one-<a4 rela!ions)i9 ;e!<een =&> and e?9or!s )as also ;een
found ;4 some s!udies (Ba,o and 7on!ero, 199IM "an!ulu and "oon, 2002M $iu
and /ra)am, 200-M %ri2as!a2a and %en, 200I) on !)e o!)er )and !)e causa!ion
;e!<een =&> and e?9or!s )as found !o ;e ;i-direc!ional in case of de2elo9ed
coun!ries in some of !)e s!udies ()med e! al., 2007M >E;al e! al., 2010). $iu e!
al., 2001 re2ealed !)e e?is!ence of one-<a4 rela!ions)i9 ;e!<een =&> and
E?9or!sM >m9or!s and =&> in ')ina.
:)e causal rela!ions)i9 ;e!<een !rade and =&> is com9le?. :)is necessi!a!es
serious a!!en!ion !o<ards in2es!i(a!in( !)e causal lin1s ;e!<een =&> and
:rade. 7os! of !)e s!udies )a2e found =&> and !rade rela!ions)i9 ;u! !)ere
e?is! lac1 of (eneral consensus amon( !)e researc)ers. :)is su((es!s !)e
rela!ions)i9 !o ;e coun!r4 s9ecific. fe< s!udies )a2e e?amined !)e
causali!4 ;e!<een e?9or!s and im9or!s of >ndia and ')ina, !)erefore, !)e
com9arison of !)ese coun!ries on !)e ;asis of !es!in( for causali!4 ;e!<een
=&>, e?9or!s and im9or!s <i!) recen! da!a is e?!remel4 needed. :)is
su((es!s !)e im9or!ance of em9irical in2es!i(a!ions of =&>D !rade
rela!ions)i9s for !)ese coun!ries.
9) Trade -erformance of India and Cina
E?9or!s no! onl4 s!imula!e economic de2elo9men! and s!ruc!ural c)an(e, ;u!
also a!!rac! =&> (=orei(n direc! in2es!men!s). :)is is also !rue !)a! !)e inflo<
of =&> 9la4s a ma,or role !o<ard !)e e?9ansion of e?9or!s of )os! coun!r4.
:)erefore, !)e a99ro9ria!e (ro<!) s!ra!e(4 is !o 9ro2ide incen!i2es for =&>,
<)ic) in !urn leads !o increase in e?9or! as <ell !)e o2erall de2elo9men! of
!)e domes!ic econom4.
>! is a99aren! from !)e !a;le 2 and fi(ure 1 !)a! from !)e 4ear 19-0 !o 2011
:radeN/&" ra!io )as a <ide ran(e i.e. 11.- O - 5I.69O in case of >ndia and 19.-
O-71.9 O in case of ')ina. s com9ared !o >ndia, !)is ra!io <as )i()er in ')ina
since 19-0. =rom 1991, >ndiaJs !radeN/&" ra!io )as ;een risin( con!inuousl4
<)ic) reac)ed a! i!s )i()es! le2el of 5I.69 9ercen! in !)e 4ear 2011. :)is ra!io in
')ina <as no!iced !o ;e 71.9 O for !)e same 4ear. :)e 4ear 200I and 2003
<i!nessed su;s!an!ial increase in !radeN/&" ra!io in >ndia and ')ina
res9ec!i2el4. :)is is due !o more li;eral and effec!i2e !rade 9romo!in( 9olic4
frame<or1 ado9!ed ;4 !)e (o2ernmen! of !)e coun!ries includin( more !rade
incen!i2es, 9ro2ision of infras!ruc!ural ne!<or1 and (enuine effor!s !o<ards
economic s!a;iliAa!ion, <)ic) correc!ed !)e <a2e of ;usiness o9!imism
en)ancin( mul!ila!eral in2es!men! a(reemen!s leadin( !o rise in forei(n mo;ili!4
of ca9i!al. >! <as !)e fa2ora;le (lo;al ;usiness en2ironmen! <)ic) <as
res9onsi;le for !remendous !rade e?9ansion in ;o!) !)e coun!ries. :a;le fur!)er
indica!es !)a! 9osi!ion of ')ina remained dominan! as com9ared !o >ndia as far
as :radeN/&" ra!io is concerned. more o9en econom4 (ains more access !o
ne< 1no<led(e and is e?9osed !o more com9e!i!ion from !)e ou!side <orld.
7oreo2er, !radeN/&" ra!io in >ndia and ')ina in !)e 4ear 2011 (5I.69 O) is found
;e similar ;ecause of more ra9id im9ro2emen! in i!s !rade 9osi!ion in case of
>ndia.
EJBE 2013, 6 (11) "a(e G -1
5enu %657 8 7andee9 #35
Table: * Trade as a -ercentage of =D- 4(8>5/*5((6
Indi
a
Cin
a
Aea
rs =D- Trade
TradeB=D-
C
=D- Trade
TradeB=D
-C
4Dmillio
n6
4Dmillion
6
4Dmillion
6 4Dmillion6
(8>
5 1-5I02 2--I0 15.55 306520 65712 21.I3
(8>
( 197762 2-651 1I.I- 293-52 70722 2I.06
(8>
* 201927 2-551 1I.13 295370 62935 21.30
(8>
2 22031- 2979- 13.52 31I637 62552 19.--
(8>
9 21-222 30223 13.-I 317352 70266 22.1I
(8>
@ 2272I7 31601 13.90 3090-3 73665 23.-3
(8>
; 2I-9-2 29--5 12.00 30I3I- 7-3I2 25.7I
(8>
< 275529 326-0 11.-6 329-51 10522- 31.90
(8>
> 30I-09 3-735 12.70 I13I39 1I2337 3I.I2
(8>
8 30176I I3I9- 1I.I1 I597-2 15I572 33.61
(88
5 327930 I925- 15.02 I0II9I 1350I5 33.3-
(88
( 2906-7 I-0II 16.52 I2I117 155536 36.67
(88
* 291925 53010 1-.15 I99-59 1526II 30.53
(88
2 2-I972 5I1-5 19.01 6I1069 1-I905 2-.-I
(88
9 32-I72 61626 1-.76 5-2653 230I97 39.55
(88
@ 370522 770-7 20.-0 756960 2-2I9- 37.32
(88
; 390520 -5760 21.96 -9201I 325-05 36.52
(88
< I200I0 916I3 21.-1 9-50I6 371655 37.72
(88
> I2-750 100265 23.3- 10I5199 371021 35.I9
(88
8 I5I952 1090I2 23.96 109--32 I112-9 37.I2
*55
5 I6-970 1190-7 25.39 1192-36 5302I3 II.I5
*55
( I-3I66 127-05 26.I3 131155- 57073I I3.51
*55
* 50395I 1397-- 27.73 1I5I0I0 697037 I7.93
*55
2 592535 16-32- 2-.I0 16I791- 93756- 56.-9
*55
9 6---03 23209I 33.69 1936502 1262371 65.1-
*55
@ -0---I 315000 3-.9I 22-255I 15I-975 67.-6
*55
; 903226 391516 I3.3I 2661265 191I056 71.92
*55
<
11I13I
6 I-I779 I2.I7 3I00351 2375-31 69.-7
*55
>
1252I0
3 577201 I6.0- I3I-303 3072963 70.67
*55
8
135321
5 5901-7 I3.61 50505I3 2II65-3 I-.II
*5(
5
172232
-
7-95I1 I5.-I 573935- 32731-I 57.03
*5(
(
1-I-2I
1 1010-30 5I.69 729-121 39-I133 5I.59
%ource* Borld >n2es!men!s 5e9or!s for !)e 4ears 19-2 !o 2012.
:)e role of =&> in e?9or! 9romo!ion in de2elo9in( coun!ries remains
con!ro2ersial and de9ends cruciall4 on !)e mo!i2e for suc) in2es!men!. >f !)e
mo!i2e ;e)ind =&> is !o ca9!ure domes!ic mar1e! !)en i! ma4 no! con!ri;u!e
!o e?9or! (ro<!). @n !)e o!)er )and, if !)e mo!i2e is !o !a9 e?9or! mar1e!s ;4
!a1in( ad2an!a(e of !)e coun!r4Js com9ara!i2e ad2an!a(e, !)en =&> ma4
con!ri;u!e !o e?9or! (ro<!). :)us, <)e!)er =&> con!ri;u!es !o e?9or! (ro<!)
or no! de9ends on !)e na!ure of !)e 9olic4 re(ime (%)arma, 2003).
"a(e G -2 EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
8
0
7
0
6
0
5
0
%
4
0
3
0
2
0
1
0
0
198
0
1
9
8
1
9
8
1
9
8
1
9
8
1
9
8
1
9
8
1
9
8
1
9
8
1
9
8
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
1
9
9
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
0
2
0
1
2
0
1
Ye
ar
s
India
C
hi
n
a
Figure (: Trade as a -ercentage of =D- in India and
Cina
:)e difference in !)e !rade 9erformances of ')ina and >ndia is 2er4
in!eres!in( ;ecause !)e !<o coun!ries s)are a 2arie!4 of common social and
economic c)arac!eris!ics. Bo! !)e coun!ries ado9!ed !)e )ea24 indus!r4-
orien!ed de2elo9men! 9olic4 and e2en launc)ed !)eir firs! =i2e-4ear "lan in
!)e same decade. ')ina and >ndiaJs !rade difference is mainl4 caused ;4 !)e
differences in !)eir de2elo9men! s!ra!e(ies. %ince !)e 19-0s, ')ina )ad
alread4 ado9!ed !)e e?9or!-orien!ed de2elo9men! s!ra!e(4 in accordance
<i!) i!s a;undance in la;or. >n con!ras!, >ndia ;e(an !o s<i!c) from !)e
in<ard-orien!ed con!rolled re(ime !o !)e ou!<ard-orien!ed re(ime onl4 in !)e
earl4 1990s. :)e la!e ado9!ion of an e?9or!-orien!ed de2elo9men! s!ra!e(4
9ar!iall4 resul!s in >ndiaJs rela!i2el4 lo<er e?9or! 2olume a! 9resen!. ')ina
ini!iall4 ado9!ed a )ea24 indus!r4-orien!ed de2elo9men! s!ra!e(4 af!er
inde9endence. 6o<e2er, ')ina lac1ed sufficien! ca9i!al !o finance )ea24
indus!ries, i! )ad !o o2er2alue i!s currenc4 and ado9! !)e im9or! su;s!i!u!ion
s!ra!e(4 ;4 se!!in( )i() im9or! !ariffs for forei(n 9roduc!s in accordance <i!)
!)e idea of infan! indus!r4 9ro!ec!ion (:ian and Pu 2011).
@) Data 7ase and #etodology
@)() 1ariables% Data Source and -eriod of te Study
:)ree 2aria;les used for !es!in( !)e causali!4 ;e!<een =&> and !rade are !)e
=orei(n &irec! >n2es!men! (=&>), E?9or! (EQ") and >m9or! (>7") for ;o!)
>ndia and ')ina. :)e da!a )as ;een collec!ed from !)e Borld &e2elo9men!
>ndica!ors and Borld &e2elo9men! 5e9or!s 9u;lis)ed ;4 !)e Borld Ban1 for
!)e 9eriod 1976-2012. ll !)e 2aria;les )a2e ;een defla!ed a! 200I-05 9rices
;4 usin( "urc)asin( "o<er "ari!4 >nde? ("">) so as !o nullif4 !)e im9ac! of
c)an(e in 9rices.
@)*) Coice of 1ariables
:)e causal rela!ions)i9 ;e!<een !rade and =&> is com9lica!ed. :)is
necessi!a!es 9a4in( an a!!en!ion !o<ards findin( !)e causal lin1s ;e!<een
=&> and :rade. 7os!
EJBE 2013, 6 (11) "a(e G -3
5enu %657 8 7andee9 #35
of !)e s!udies )a2e found =&> and !rade rela!ions)i9. %ome )a2e
in2es!i(a!ed ;i-direc!ional causali!4, (iAenmana and 0o4, 2006M =on!a(ne
and "a,o!, 2000) <)ile some o!)ers )a2e found uni-direc!ional rela!ions)i9s
;e!<een !)ese 2aria;les (:edesse and 54an, 2001M "an!ulu and "oon,
2002). %e2eral s!udies in2es!i(a!ed causali!4 ;e!<een =&> and e?9or!s.
%ri2as!a2a and %en (200I) found uni-direc!ional causali!4 runnin( ;e!<een
=&> and e?9or!s for >ndia and $iu and /ra)am (200-) o;ser2ed !)e same
resul!s for :ai<an and %ou!) #orea ;u! !)e ;idirec!ional causali!4 )as ;een
found ;4 iAenmana and 0o4, (2006) and >E;al e! al. (2010) for de2elo9in(
coun!ries and for "a1is!an res9ec!i2el4.
:)is su((es!s !)e rela!ions)i9 !o ;e coun!r4 s9ecific. small num;er of
s!udies )a2e e?amined !)e causali!4 ;e!<een e?9or!s and im9or!s of >ndia
and ')ina, !)erefore, !)e com9arison of !)ese coun!ries on !)e ;asis of
!es!in( for causali!4 ;e!<een =&>, e?9or!s and im9or!s <i!) recen! da!a is
e?!remel4 needed. :)is su((es!s !)e im9or!ance of em9irical in2es!i(a!ions
of =&>D!rade rela!ions)i9s for !)ese coun!ries.
@)2) "ypoteses Taken in te Study
:)e 2arious )49o!)eses !o ;e !es!ed for ac)ie2in( !)e a;o2e men!ioned
o;,ec!i2e of !)e s!ud4 are ca!e(oriAed as under*
1- >m9or!s do no! cause =&>
2- =&> does no! cause >m9or!s
3- E?9or!s do no! cause =&>
4- =&> does no! cause E?9or!s
5- >m9or!s do no! cause E?9or!s
6- E?9or!s do no! cause >m9or!s
@)9) +conometric #etodology
:)e firs! s!e9 in !)e anal4sis is !o 2erif4 !)e s!a!ionari!4 of !)e da!a series.
u(men!ed &ic1e4-=uller (&=) !es! )as ;een em9lo4ed for !)is 9ur9ose.
:)e uni! roo! 9ro9er!4 of !)e da!a series is crucial for !)e causali!4 anal4ses.
Caria;les !)a! are non-s!a!ionar4 can ;e made s!a!ionar4 ;4 differencin( !)e
num;er of differencin( (d) reEuired !o ma1e !)e series s!a!ionar4 iden!ifies
!)e order of in!e(ra!ion 1(d). :)e uni! roo! !es! resul!s re2eal !)a! !)e null
)49o!)esis of uni! roo! for !)e selec!ed 2aria;les suc) as =&>, e?9or!s and
im9or!s in case of eac) indi2idual coun!r4 <as no! re,ec!ed a! le2els. Bu!,
<)en !)e series are firs! differen!ia!ed, ;o!) !)e series are found !o ;e
s!a!ionar4 and in!e(ra!ed a! !)e order of one 1(1).ll !)e 2aria;les (=&>, EQ"
and >7") )a2e ;een !a1en in lo(ari!)mic form !o ma1e !)em s!a!ionar4 a!
lesser order of in!e(ra!ion. f!er !)a!, s!a!ionari!4 of 5e(ression residuals for
es!ima!in( !)e e?is!ence of coin!e(ra!in( rela!ions)i9s ;e!<een =&>, E?9or!s
and >m9or!s )a2e ;een !es!ed for >ndia and ')ina. En(le /ran(er !es! for
coin!e(ra!ion can ;e used if !)e residuals of !)e da!a
"a(e G -I EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
series are s!a!ionar4, <)ic) means !)ere e?is! coin!e(ra!ion rela!ions)i9
;e!<een !)e 2aria;les.
&= !es! )as ;een used in order !o !es! !)e s!a!ionari!4 of residuals. >! )as
;een found !)a! !)e re(ression residuals are non s!a!ionar4 so !)e
coin!e(ra!ion !ec)niEue canno! ;e a99lied so s!andard /ran(er 'ausali!4
!es! )as ;een used !o e?amine 9ossi;le causal rela!ions)i9s amon( !)ree
2aria;les i.e. =&>, E?9or!s and >m9or!s in >ndia as <ell as in ')ina
se9ara!el4. =irs!l4 follo<in( unres!ric!ed eEua!ion <i!) n la(s is es!ima!ed ;4
usin( @$%.
l l
(1.1)
F

t
=

0
+

i
F
t i
+

j
E
t j
+

t
i =1 j =1
=
+
l
+
l
+
t
E
t

i
E
t i

j
F
t j
i = 1 j = 1 (1.2)
EEua!ion 1.1 9os!ula!es !)a! curren! e?9or!s is rela!ed !o 9as! 2alues of
e?9or!s i!self as <ell as of =&> and eEua!ion 1.2 9os!ula!es a similar ;e)a2ior
for =&> similarl4 in order !o s!ud4 !)e (ran(er causali!4 ;e!<een =&> and
im9or!sM e?9or!s and im9or!s follo<in( se!s of eEua!ions can ;e framed.
l l
F
t
=

0
+

i
F
t i
+

j
I
t j
+

t
i
=1 j =1 (2.1)
l l
I
t
= +

i I
+

j
F
t j
+
t
i =
1
t

i j = 1 (2.2)
l l
I
t
=
0
+

i
I
t i
+

j
E
t j
+
t
i =1 j =1 (3.1)
l l
E
t
=
+

i
E
t i
+

j
I
t j
+
t
i = 1 j = 1 (3.2)
B)ere = s!ands for =&>M E for e?9or!s and > for >m9or!s.
:o !es! !)e null )49o!)esis = !es! is conduc!ed ;4 com9arin( !)e res9ec!i2e
residual sum of sEuares, <)ic) are (i2en as*
5%%i R S !
T !2
M
5%
%0 R S! U !2
:)e !es! s!a!is!ics (i2en as*
(5%%0-
5%%i)N"
= R
5%%N(:R2"-
1)
V =">:-
29-1
>! follo<s !)e = dis!ri;u!ion <i!) m and (n-1) de(rees of freedom. >f !)e
com9u!ed 2alue of = is (rea!er !)an !)e s9ecified cri!ical 2alue !)en !)e null
)49o!)esis is re,ec!ed (/u,ra!i, 200I).
@)@) Statistical Diagnostic
:)ree models )a2e ;een cons!ruc!ed !o c)ec1 !)e s!a!ionari!4 of re(ression
residuals, <)ere &= !-s!a!is!ics for residual <as found !o ;e insi(nifican! in
;o!) !)e coun!ries and !)e resul!s are re9or!ed in :a;le no. 3 for >ndia and
:a;le no. I for ')ina.
EJBE 2013, 6 (11) "a(e G -5
5enu %657 8 7andee9 #35
Table: 2 !esults for Stationarity of !esiduals for +stimating
Cointegrating !elationsips between FDI% +,ports and Imports
4India6
ADF
Decision
about
#odels
Const
ant
Coeffici
ent
D)
E
Ad3usted
!
*
t/
Statistics
for presence of
!esidual
Cointegratio
n
#odel ( 7.I-9 0.I63 0.
77 0.-9 -3.212 0o 4I#- on
FDI6 (I0.I9)* (16.37)*
#odel * 7.266 0.I75 0.
97 0.90 -3.I03 0o 4+F- on
FDI6 (I1.26)* (17.65)*
#odel 2 0.37- 0.977 0.
I7 0.99 -2.-5- 0o 4+F- on
I#-6 (2.3I)* (61.90)*
* deno!es si(nificance a! !)e le2el 1O.
Table: 9 !esults for Stationarity of !esiduals for +stimating
Cointegrating !elationsips between FDI% +,ports and Imports
4Cina6
ADF
Decision
about
#odels
Const
ant
Coeffici
ent
D)
E
Ad3usted
!
*
t/Statistics
for presence of
!esidual
Cointegrati
on
#odel ( 0.3-6 -.116 0.
2- 0.-0 -1.121 0o 4I#- on
FDI6 (11.37)* (27.72)*
#odel * 0.I01 -.065 0.
25 0.79 -1.II6 0o 4+F- on
FDI6 (11.1I)* (26.03)*
#odel 2 0.957 0.I12 1.
06 0.99 -3.15- 0o 4+F- on
I#-6 (72.--)* (2.77)*
* deno!es si(nificance a! !)e le2el 1O.
:)e resul!s s)o< !)e a;sence of coin!e(ra!in( rela!ions)i9 ;e!<een !)e
2aria;les of !)e s!ud4. %ince all !)e 2aria;les are no! coin!e(ra!ed, !)e
s!andard (ran(er causali!4 !es! !o de!ermine s)or! run causal rela!ions)i9
;e!<een !)e 2aria;les can ;e 9erformed <i!)ou! includin( !)e error
correc!ion !erm.
;) +mpirical Findings
>n !)e con2en!ional !<o coun!r4 !rade models ;ased on !)e 6ec1sc)er- @)lin
frame<or1, fac!or mo;ili!4 across coun!ries ma4 su;s!i!u!e for !rade if
9roduc!ion func!ions are iden!ical, ;u! ma4 com9lemen!s !rade if ca9i!al flo<s
in!o forei(n indus!ries in <)ic) domes!ic in2es!ors )a2e a com9ara!i2e
disad2an!a(e. >n !)e !)eories of =&>, !<o !49es of 9roduc!ion arran(emen!s
are 1no<n !o e?is! in mul!ina!ional en!er9rises i.e. 2er!ical in!e(ra!ion and
)oriAon!al in!e(ra!ion. :)e former is li1el4 !o facili!a!e !rade ;4 increasin(
e?9or!s of ca9i!al eEui9men!s and fac!or ser2ices from !)e )ome coun!r4.
:)e la!!er is a su;s!i!u!e for !rade (i2en !)a! mul!ina!ional en!er9rises )a2e
s)if!ed !)eir 9roduc!ion for e?9or!s from !)eir )ome coun!r4 !o !)e )os!
coun!r4 ($iu and %)u, 2001). :)e em9irical findin(s ;ased on /ran(er model
are s)o<n in !a;les 5 and 6 for >ndia and ')ina res9ec!i2el4.
5esul!s of /ran(er causali!4 !es! for >ndia as 9resen!ed in !)e !a;le 5 s)o<
!)a! !)e null )49o!)esis of L=&> does no! cause im9or!sJ is re,ec!ed a! 1O
le2el. 7oreo2er,
"a(e G -6 EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
null )49o!)esis for Lim9or!s do no! cause =&>J is also re,ec!ed a! 1O
si(nificance le2el. :)is leads !o !)e conclusion !)a! !)ere e?is! ;idirec!ional
causali!4 ;e!<een =&> and im9or!s. %imilarl4 !)e null )49o!)esis of L=&> does
no! cause e?9or!sJ as <ell as null )49o!)esis for Le?9or!s do no! cause =&>J
)a2e ;een re,ec!ed a! 1O le2el. :)is also indica!es !)e 9resence of
;idirec!ional causali!4 ;e!<een =&> and e?9or!s. :)ere is s!ron( e2idence of
;idirec!ional causali!4 ;e!<een e?9or!s and im9or!s as !)e null )49o!)esis of
Le?9or!s do no! cause im9or!sJ and 2ice-2ersa )a2e ;een re,ec!ed a! 1O
le2el. >n ;rief i! can ;e said !)a! =&> causes im9or!s <)ic) in !urn causes
e?9or!s and e?9or!s fur!)er causes =&>. >! is also no!ed !)a! =&> also causes
e?9or!s <)ic) in !urn leads !o more im9or!s.
Table: @ =ranger Causality Test for FDI% +,ports and Imports in
India
.ull "ypoteses F values - values Inferences
Imports do not cause FDI 9.617 0.000* 5e,ec!ed
FDI does not cause Imports 6.0I0 0.007* 5e,ec!ed
+,ports do not cause FDI 26.017 0.000* 5e,ec!ed
FDI does not cause +,ports 5.235 0.013* 5e,ec!ed
Imports do not cause
+,ports 27.9-5 0.000* 5e,ec!ed
+,ports do not cause
Imports 36.-06 0.001* 5e,ec!ed
*%i(nifican! a! 1O.
Table: ; =ranger Causality Test for FDI% +,ports and Imports in
Cina
.ull "ypoteses F values - values Inferences
Imports do not cause FDI 1.-33 0.1-1 cce9!ed
FDI does not cause Imports 3.02I 0.067*** 5e,ec!ed
+,ports do not cause FDI 1.13I 0.33- cce9!ed
FDI does not cause +,ports 2.615 0.091*** 5e,ec!ed
Imports do not cause
+,ports 6.092 0.007* 5e,ec!ed
+,ports do not cause
Imports I.7I1 0.01-* 5e,ec!ed
*%i(nifican! a! 1O, *** %i(nifican! a! 10O.
:a;le 6 si(nifies !)e (ran(er causali!4 resul!s for ')ina. :)e resul!s of >ndia
is no! similar !o ')ina as !)e causali!4 ;e!<een !<o 2aria;les is also coun!r4
s9ecific. :)e null )49o!)esis L=&> does no! causs im9or!sJ is re,ec!ed a! 10O
le2el on !)e o!)er )and !)e null )49o!)esis of Lim9or!s do no! cause =&>J is
acce9!ed, <)ic) indica!es !)e unidirec!ional causali!4 runnin( from =&> !o
im9or!s. (ain !)e null )49o!)esis for L=&> does no! cause e?9or!sJ is
re,ec!ed a! 10O le2el, and !)e null )49o!)esis for LE?9or!s do no! cause =&>J
is no! re,ec!ed. :)ere is onl4 one <a4 causali!4 runnin( from =&> !o e?9or!s,
<)ic) indica!es !)a! =&> causes e?9or!s ;u! e?9or!s do no! influence =&>.
:)e )49o!)esis of Lim9or!s do no! cause e?9or!sJ is re,ec!ed a! 1O le2el, and
!)e )49o!)esis of LE?9or!s do no! cause >m9or!sJ is also re,ec!ed a! 1O
re9resen!in( !)e ;idirec!ional causali!4 ;e!<een im9or!s and e?9or!s. :)ese
em9irical resul!s indica!e a 2ir!uous 9rocedure of de2elo9men! for ')ina i.e.
more =&> in!o ')ina <ill lead !o more im9or!s, <)ic) in !urn <ill lead !o rise
in e?9or!s. =ur!)ermore, more im9or!s leads !o more e?9or!s ;ecause of
s4ner(ies crea!ed ;4 !)is 9rocedure.
EJBE 2013, 6 (11) "a(e G -7
5enu %657 8 7andee9 #35
')inaJs in<ard =&> and !rade )a2e e?9anded 2er4 ra9idl4 o2er !)e las! !<o
decades. ')ina is a la;our a;undan! de2elo9in( coun!r4. @ne im9or!an!
a!!rac!ion of ')ina as a )os! coun!r4 is i!s rela!i2el4 c)ea9er la;our. :)e
com;ina!ion of forei(n !ec)nolo(ical, mana(erial and mar1e!in( e?9er!ise
<i!) ')inaJs la;our force and o!)er endo<men!s ma1es forei(n su;sidiaries
more com9e!i!i2e and a;le !o e?9or! ;ac1 !o !)eir 9aren! coun!r4. :)e
causa!ion from =&> !o ')inaJs e?9or! (ro<!) ma4 also reflec! ')inaJs s9ecial
=&> 9olic4, <)ic) encoura(es forei(n-in2es!ed firms !o e?9or! !)eir 9roduc!s.
7os! of !)e ne<l4 indus!rialiAed economies 9roduce la;our in!ensi2e
9roduc!s in ')ina and !ransfer !)e 9roduc!s ;ac1 !o !)e )ome economies
($iu e!.al., 1997).
<) Summary% Limitations and Suggestions
@;,ec!i2e of !)e 9resen! s!ud4 is !o c)ec1 !)e causali!4 ;e!<een =&> and !rade.
=or !)is o;,ec!i2e, 'oin!e(ra!ion !ec)niEue )as ;een em9lo4ed !o e?amine !)e
causal rela!ion ;e!<een =&> and !rade in >ndia as <ell as in ')ina se9ara!el4.
/ran(er causali!4 !es! for ')ina (i2es !)e resul!s <)ic) are no! similar !o >ndia
!)a! su((es!s !)a! causali!4 ;e!<een !<o 2aria;les is also coun!r4 s9ecific. :)ere
is s!ron( e2idence of unidirec!ional causali!4 runnin( from =&> !o im9or!s and =&>
!o e?9or!s i.e =&> influences im9or!s and e?9or!s ;u! no! caused ;4 im9or!s and
e?9or!s. 6o<e2er, !)ere e?is! ;idirec!ional causali!4 ;e!<een im9or!s and
e?9or!s. :)e em9irical resul!s indica!e a 2ir!uous 9rocedure of de2elo9men! for
')inaM more =&> in!o ')ina leads !o more im9or!s, <)ic) in !urn leads !o more
e?9or!s ;ecause of s4ner(ies crea!ed ;4 !)is 9rocedure. >n !)is sense, in<ard
=&> a! econom4 le2el in ')ina can ;e re(arded as efficienc4 see1in(, <)ic)
increases !)e 2olume of !rade. :)e causa!ion from =&> !o ')inaJs e?9or! (ro<!)
ma4 also reflec! ')inaJs s9ecial =&> 9olic4, <)ic) encoura(es forei(n-in2es!ed
firms !o e?9or! !)eir 9roduc!sM man4 firms from ne<l4 indus!rialiAed economies
!rea! ')ina as !)eir e?9or! 9la!form. :)e resul!s for >ndia s)o< !)a! !)ere e?is!s
;idirec!ional causali!4 ;e!<een =&> and im9or!s, =&> and e?9or!s and e?9or!s
and im9or!s <)ic) indica!e !)a! =&> causes im9or!s (im9or!in( !ec)nolo(ies)
<)ic) in !urn causes e?9or!s and e?9or!s fur!)er cause =&>. 7oreo2er, i! is also
no!ed !)a! =&> also causes e?9or!s <)ic) in !urn leads !o more im9or!s.
Bi-causal rela!ions)i9 ;e!<een im9or!s and e?9or!s )as ;een found in ;o!)
!)e coun!ries <)ic) su((es! !)a! >ndia and ')ina s)ould focus more on
!ec)nolo(4 im9or!s and i!s !ransfer as an essen!ial condi!ion for e?9andin(
e?9or!s of !)ese coun!ries. /o2ernmen! of !)ese coun!ries s)ould use !)is
9ers9ec!i2e of im9or!s as an effec!i2e measure in formula!ion of !)eir e?9or!
9romo!ion s!ra!e(4. :)is <ill also 9romo!e indus!rial u9(rada!ion !)rou()
ad2anced mac)iner4 and eEui9men!.
l!)ou() !)is s!ud4 )as ;een a;le !o e?9lore e?!ensi2el4 !)e se! o;,ec!i2es
4e! !)ere are man4 o!)er sian coun!ries <)ic) could also ;e included in !)e
s!ud4 ;u! due !o !ime and da!a cons!rain!s !)is <or1 )as ;een res!ric!ed !o
>ndia and ')ina onl4.
"a(e G -- EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
<)() Scope for Furter !esearc
1- &urin( !)e 9as! !<o decades, =&> )as ;ecome increasin(l4 im9or!an! in
de2elo9in( coun!ries. mon( !)e de2elo9in( coun!ries, !)e sian coun!ries
)a2e lar(e s)are of =&> inflo<s in !)e las! !)ree decades. :)e s!ud4 can ;e
fur!)er e?9anded ;4 com9arin( economic 9erformance of more sian
coun!ries <i!) lon(er !ime s9an for !)e anal4sis.
2- =&> inflo<s in %ou!) sia <ere associa!ed <i!) a man4 fold increase in
!)e in2es!men! ;4 na!ional in2es!ors. >! is an im9or!an! as9ec! in 9ursuin(
(ro<!) and de2elo9men! amon( coun!ries. >!s role in (lo;al ;usinesses is
crucial enou() !o de!ermine <)e!)er ne< mar1e! !rends or mar1e!in(
c)annels affec! a s9ecific coun!r4. :)erefore economic im9ac! of forei(n
direc! in2es!men! in %ou!) sian coun!ries is of in!eres! in i!self.
!eferences
')o9ra, '. (2003), =orei(n >n2es!men! in >ndia(>s! ed.), &ee9 and &ee9 "u;lica!ion,
0e< &el)i.
')o<d)ar4, . and 7a2ro!as, /. (2003), W=&> and /ro<!) B)a! 'auses B)a!X, 9resen!ed
a! !)e B>&E5 'onference on W%)arin( /lo;al "ros9eri!4X, )eld on 6-7 %e9!em;er, 2003,
/erman4.
&as), 5.#. and %)arma, '. (2010), W&oes 'ausali!4 ;e!<een =&> and :rade E?is!*
E2idence from %ou!) siaX, >n!erna!ional Journal of :rade and /lo;al 7ar1e!s,
3(I)390-I13.
/u,ra!i, /., (200I), Basic Econome!rics (I!) ed.), 7' /ra< 6ill, 0e< Por1.
>E;al, 7. %, (2010), W'ausali!4 5ela!ions)i9 ;e!<een =orei(n &irec! >n2es!men!,
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Ja4ac)andran, J. and %eilan, . (2010), W>n!erna!ional 5esearc) Journal of =inance
and EconomicsX 'ausal 5ela!ions)i9 ;e!<een :rade, =orei(n &irec! >n2es!men!
and Economic /ro<!) for >ndia (I2)* 1I50-2--7
#arliner, :. (1997), W C5 99roac) !o !)e Economics of =&> in ')inaX, 99lied
Economics, 3I(7)* I31-II5.
$iu, /.%.M $iu, Q. and Bei, P. (2001), W@9enness and Efficienc4 of >ndia and ')ina
5ela!i2e !o !)e Borld Econom4X, "u;lic "olic4 &iscussion "a9ers 0o. 02-1-, Brunel
3ni2ersi!4, 3.#.
$iu, Q. and %)u, '. (2001), W&e!erminan!s of E?9or!s "erformance and !)e Effec!s of
!)e B:@ En!r4 on $a;our >n!ensi2e E?9or!s* E2idence from ')inaJs 7anufac!urin(X,
)!!9NN* cisinfoN;oro.ac.u1.01Nc1N<r0013.)9a ccessed on 15!) u(. 2007.
$iu, Q.M Ban(, '. and Bei, P. (2002), W'ausal $in1s ;e!<een =orei(n &irec!
>n2es!men! and :rade in ')inaX, ')ina Economic 5e2ie<, 12(2)*190-202.
$ui, %on(, Bei and 5omill4, (1997), Wn Em9irical >n2es!i(a!ion of !)e 'asual
5ela!ions)i9 ;e!<een @9enness and Economic /ro<!) in ')inaX, 99lied
Economics, 29(2)*1679-16-6.
"rad)an, J.". and ;ra)am, C. (200I), W!!rac!in( E?9or! @rien!ed =&>* 'an >ndia Bin !)e
5aceYX, Bor1in( "a9er 0o. 156, /u,ara! >ns!i!u!e of &e2elo9men! 5esearc). /o!a,
)meda;ad.
%)arma, #. (2000), WE?9or! /ro<!) >n >ndia* 6as =&> "la4ed 5oleYX 'en!er
&iscussion "a9er 0o. -16. )!!9*NN<<<.econ.4ale.eduNZe(cen!er, ssessed on =e;.
2011.
EJBE 2013, 6 (11) "a(e G -9
5enu %657 8 7andee9 #35
%)arma, #. (2003), W=ac!ors &e!erminin( >ndiaJs E?9or! "erformanceX, Journal of
sian Economies, 1I(2)* I35-II6.
:edesse, B. and 54an, 7. (2001), W:)e =&>-:rade 5ela!ions)i9* re &e2elo9in(
'oun!ries &ifferen!YX in &oes =&> "romo!e &e2elo9men!, edi!ed ;4 :)eodore, 6. 7M
Ed<ard, 7./. and 7a(num, B., >ns!i!u!e of >n!erna!ional Economics and 'en!re for
/lo;al &e2elo9men!, Bas)in(!on, &.'., 136-1I-, (3rd ed.).
:ian, B. and Pu, 7. (2011), W')ina and >ndia* :rends in :rade o2er !)e $as! &ecadeX,
:)e Journal of ')ina and /lo;al Economics, 1(1)* 27-3-.
30':&, (197- !o 2009), WBorld >n2es!men! 5e9or!X 3ni!ed 0a!ions 'onference on
:rade and &e2elo9men!, 0e< Por1 and /ene2a.
30':&, (1996 and 1999), WBorld >n2es!men! 5e9or!X 3ni!ed 0a!ions 'onference
on :rade and &e2elo9men!, 0e< Por1 and /ene2a.
30':&, Borld &e2elo9men! >ndica!ors &a!a Base, (2005-06, 2007-0- and 200--
09), 3ni!ed 0a!ions 'onference on :rade and &e2elo9men!, 0e< Por1 and /ene2a.
F)an(, #.6. and %on(, %. (2000), W"romo!in( E?9or!s* :)e 5ole of >n<ard =&> in
')inaX, ')ina Economic 5e2ie<, 11(I)* 3-5-396.
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12(1)* -2-99.
Appendi,
=ranger Causality Test for +,ploring te !elationsips
between FDI% +,ports and Imports in
India
"air<ise /ran(er 'ausali!4
:es!s &a!e* 06N09N12 :ime*
15*12 %am9le* 1 35
0ull 649o!)esis* @;s
=-
%!a!is!ic "ro;.
=&> does no! /ran(er 'ause EQ"@5:% 29 5.235-5 0.0130
EQ"@5:% does no! /ran(er 'ause =&> 26.0170 1.E-06
"air<ise /ran(er 'ausali!4 :es!s
&a!e* 06N09N12 :ime* 15*12
%am9le* 1 35
0ull 649o!)esis* @;s
=-
%!a!is!ic "ro;.
EQ"@5:% does no! /ran(er 'ause
>7"@5:% 29 36.-062 5.E-0-
>7"@5:% does no! /ran(er 'ause
EQ"@5:% 27.9-52 5.E-07
"air<ise /ran(er 'ausali!4 :es!s
&a!e* 06N09N12 :ime* 15*12
%am9le* 1 35
0ull 649o!)esis* @;s
=-
%!a!is!ic "ro;.
=&> does no! /ran(er 'ause >7"@5:% 29 6.0I017 0.0075
>7"@5:% does no! /ran(er 'ause =&> 9.61732 0.0009
"a(e G 90 EJBE 2013, 6 (11)
'ausal $in1s ;e!<een =orei(n &irec! >n2es!men!s and :radeH
=ranger Causality Test for +,ploring te !elationsips
between FDI% +,ports and Imports in
Cina
"air<ise /ran(er 'ausali!4
:es!s &a!e* 06N09N12 :ime*
1-*22 %am9le* 1 35
0ull 649o!)esis* @;s
=-
%!a!is!ic "ro;.
EQ" does no! /ran(er 'ause =&> 29 1.13I1I 0.33-3
=&> does no! /ran(er 'ause EQ" 2.615I- 0.093-
"air<ise /ran(er 'ausali!4 :es!s
&a!e* 06N09N12 :ime* 15*12
%am9le* 1 35
0ull 649o!)esis* @;s
=-
%!a!is!ic "ro;.
>7" does no! /ran(er 'ause =&> 29 1.-3351 0.1-15
=&> does no! /ran(er 'ause >7" 3.02I17 0.067I
"air<ise /ran(er 'ausali!4 :es!s
&a!e* 06N09N12 :ime* 15*12
%am9le* 1 35
0ull 649o!)esis* @;s
=-
%!a!is!ic "ro;.
EQ" does no! /ran(er 'ause >7" 29 I.7I193 0.01-I
>7" does no! /ran(er 'ause EQ" 6.09277 0.0072
EJBE 2013, 6 (11) "a(e G 91