The Causal Relationship between Trade and FDI: Implication for India and East Asian Countries

This study tries to find the causal relationship between bilateral trade and FDI in India and East Asian countries using macroeconomic data and derive policy implications for regional integration. Since the late 2000s, Korea, Japan and Singapore’s trade and FDI with India have been rapidly increasing, but the causal relationship between trade and FDI could not be found, contrary to expectations. The relationship between trade and FDI in the US, the UK and Germany with India showed one-way or two-way causality, respectively. The estimation suggests that the causal relationship between trade and FDI in both countries could be formed by long-term economic exchange rather than a short-term surge in scale.