Interactions among Infrastructure, Trade Openness, Foreign Direct Investments and Economic Growth in India
Theoretical literature reveals that infrastructure development/investment is a key pre-condition to foreign direct investment (FDI), trade openness and economic growth in any economy. But the relationship between infrastructure development and economic growth has been controversial and several empirical studies examining this issue have found high returns to infrastructure development/investment (Alwafi 2017; Aschauer 1989; Asiedu 2002; Chi and Baek 2016; Mishra, Kunapareddy and Kar 2013; Mohanty and Bhanumurthy, 2018; Sahoo and Dash 2009; Sanchez-Robles, 1998); while, another group of studies provide the evidence that infrastructure development/capital has an insignificant (little impact) or no effect (or mixed effects) on economic growth and productivity (Berechman, Ozmen and Ozbay 2006; Chandra and Thompson 2000; Ewing 2008; Garcia-Mila, McGuire and Porter 1996; Holtz-Eakin and Schwartz 1995; Tatom, 1993). Furthermore, besides mixed effects of infrastructure on economic growth, the direction of the causal relationship between infrastructure and economic growth, remains vague (Olarreaga 2016).
Studies that have investigated the effect of infrastructure and foreign direct investment (FDI) on economic growth and interaction among them found that improvement in electricity and transport infrastructure induces growth and interactive effect of FDI and infrastructure improves economic growth (Nketiah-Amponsah and Sarpong 2019). Pradhan et al. (2013) showed the existence of bi-directional causality between FDI and economic growth and a unidirectional causality from transport infrastructure to both FDI and economic growth in India. Thompson (2011) indicated that trade openness and infrastructural development encouraged the inflow of FDI in Sub-Saharan African countries (SSA) and that FDI and infrastructural development contributed towards enhancing economic growth.
Hence, this study seeks to re-examine the relationships among these key macroeconomic aggregates and economic growth and their effectiveness on long-run growth performance of a fast-developing country—India in a time-series context. Although there have been a few studies that examined different aspects of the role of infrastructure in economic growth in the Indian context (Ghosh and De 2005; Mishra, Kunapareddy and Kar 2013; Pradhan et al. 2013; Sahoo and Dash 2009), these studies and foregoing literature have typically ignored the roles of trade and FDI inflows in the relationship between infrastructure development and economic growth, and this study fill up this research gap by incorporating these important variables in an augmented aggregate production function (APF) framework.