FDI and Trade in Services Towards Sustainable Economic Growth: An Empirical Evidence from India

FDI and Trade in Services Towards Sustainable Economic Growth: An Empirical Evidence from India

Madhabendra Sinha (Department of Humanities and Social Sciences, National Institute of Technology Durgapur, Durgapur, India) and Partha Pratim Sengupta (Department of Humanities and Social Sciences, National Institute of Technology Durgapur, Durgapur, India)
Copyright: © 2017 |Pages: 12
DOI: 10.4018/ijsem.2017010102
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Abstract

The paper empirically investigates the inter-linkage between FDI inflow and international trade in service sector in India. Service sector emerges as the fastest growing sector worldwide during current phase of globalization, contributing more than 60 percent of output and almost 35 percent of trade in global economy. The sector also accounted for 63 percent of global stock of FDI. With hosting a large amount of FDI inflow, Indian service sector is also identified globally due to its substantial improvement in growth and export in international market. So there needs a study to explore the theoretically established causal relationship between FDI inflow and international trade in services towards sustainable and service led economic growth in India. The authors collect monthly data from DIPP, Government of India and RBI over a globally witnessed emerging period from January 2009 to June 2016 and apply ADF and PP unit root tests followed by least square estimation after testing the seasonal effects. Their findings imply unidirectional causality between FDI inflow and export Indian services.
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Introduction

Sustainable economic growth has been an emerging topic of discussion and further research nowadays where the role foreign capital in terms of FDI inflows in the process of international trade at sector level is a debatable issue in the transitional as well as developing economies like India, where very few specific sectors like services lead the economic growth, which is also linked with export patterns of those sectors. With the lack of capital stock, poor technological base of production is also another factor for impinging upon growth in developing countries. In this situation FDI inflow can mitigate various constraints of growth to some extents by bringing foreign capital with modern technology, organizational structures and managerial techniques (Prakash & Balakrishnan, 2006). The UNCTAD (2015) reported that global inflow of FDI has been decreased by 16 percent whereas the developing countries have accounted for a record 55 percent of global FDI inflows, reached their highest level ever at US$ 681 billion with a 2 percent increase in 2014. The report has also pointed out that starting from a baseline of less than US$ 1 billion in 1990; India ranked the eighth position and recorded an outstanding increase in FDI inflows reached at US$ 34 billion with 22 percent increase in 2014. During the period of post liberalization, India has not witnessed only higher growth of aggregate FDI inflows but also the sector wise composition of FDI has changed considerably. Service sector has absorbed a very little portion of FDI during the first decade of post reform period. According to narrow definition of DIPP, Government of India, only 7 percent of total FDI inflow came into this sector. But the broad definition of service sectors, include telecommunications, construction, computer software, trading, transports, information and broadcasting, hotel and tourism, consultancy services, health services and education, have described the share of total FDI inflows has gone up to 44 percent during this period. In the second decade of the period of post economic reforms this share increased even further to 60 percent. Financial, construction, communications, power, computer software and trade services have attracted larger part of FDI inflows as compared to other sectors within services.

During the last two and half decades, service sector has emerged as one of the fastest as well as largest growing sector in the world economy, contributing more than 60 percent of global output, even larger share of employment in many countries (Hoekman and Mattoo, 2008). The increasing share of services in global transactions has also accompanied the growth in service sectors. The fact that during the same time period trade in services has grown as fast as trade in goods is the cause of rise in international supply of services. The ratio of global trade in services to goods has increased to 27 percent in 2010 from 20 percent in 1980 (WDI, 2011). Service sectors have also attracted huge amount of FDI inflows. Sector wise data of FDI stock provided by UNCTAD (2015) highlighted that the prominent role of services in global FDI. The services have accounted for 63 percent of global FDI stock, more than twice the share of manufacturing, at 26 percent in 2012. There is a shift of ongoing sector level composition of FDI from manufacturing to services because the share of services in global FDI stock has been increased by 14 percent with a corresponding decrease in that in manufacturing sectors from 41 percent to 26 percent during post reform period.

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