ABSTRACT
The study empirically examines the causal relationship between FDI inflows, economic growth and trade openness in India. The structural break unit root tests reveal that the time-series data are stationary. Unlike previous studies, the structural breakpoints are identified in the time-series data (FDI inflows, GDP and Trade Openness) using the Bai and Perron (1998) test to incorporate into the ARDL model. The ARDL bounds cointegration analysis reveals that the variables are associated in the long term. The ARDL-error correction model with structural breaks reveals a bidirectional causation between the FDI inflows and trade openness in the long run. However, the study does not confirm the long-term causality between economic growth and FDI inflows. The empirical evidence demonstrates a weak short-run bidirectional causation between FDI inflows and economic growth, whereas trade does not significantly affect either GDP or FDI. The study suggests that the economy should focus long-term policies on enhancing GDP growth to attract more FDI inflows into the economy. Besides, the country should pay attention towards more liberal trade policies to attract more foreign capital flows and promote growth in the short run.
