An Analysis of the Interaction of Trade and Foreign Direct Investment between South Korea and India

Abstract

This paper investigates the interaction of foreign direct investment (FDI) and trade between S. Korea and India from 1983 to 2012. To examine the relationship between trade and FDI, we established multivariate estimations for trade and FDI, including Gross National Income and effective exchange rate. We applied impulse response analysis using the Vector Error Correction Model to determine the effect of a shock emanating from an endogenous variable on other variables. One finding is that a unidirectional link exists between trade and FDI, but not vice versa. The export of S. Korea to India positively affects the growth of the outward FDI of S. Korea into India. This finding indicated that the relationship between trade and FDI of S. Korea to India is unidirectional. Both trade and FDI also do not affect either the income of the two countries or their effective exchange rate. The main reason for this result is that the amount of FDI and/or trade is considerably small to generate any dynamic spillover effect.