Foreign Direct Investment and Imports in India: Exploring Institutional Dimensions

In the knowledge economy, globalisation and its various types are increasingly recognised as the substance of competencies. The major two types of globalisation possessing macroeconomic utility, i.e. FDI and trade, are significantly influenced by country-level factors. Given their differing characteristics, they react to macroeconomic factors differently. In this view, this study looks at how institutional variables affected trade and investment from 30 countries into India from 2002 to 2020, as India plays a major role in the global arena, it attracts a sizable amount of international investment and foreign trade. Four institutional factors are considered in the analysis and the results suggest that improved property rights protection and government integrity in India attracts both FDI and imports. The increased government size and high-quality regulatory environment although positively influence FDI and imports, both have an insignificant effect on FDI while both are significant in case of imports. Alternative estimators are applied to obtain an appropriate synchronisation between variables but the Random effect model came out to have optimum utility to be applied in the current study. The study is controlled for the effects of human capital since it is an important regressor of internationalisation behaviour. Based on the results of granger causality, FDI is taken as a control variable for imports. The distinguishing feature of this study is that a comparative analysis between FDI and trade inflow in India from an institutional perspective has been undertaken which is not present in the extant literature.