Impact of FDI on Services Export: Evidence from India

Trade in services has grown more rapidly than merchandise trade. Information technology and business process outsourcing are among the fastest growing sectors in terms of services export.FDI is widely viewed as being one of the principal vehicles for the international transfer of technology. FDI results in increase in productive capital stock, technological growth, and facilitates transfer of managerial skills, besides improving global market access.This paper is examines empirically the role of FDI on services export using econometric tools Introduction Service sector has emerged as the largest and fastestgrowing sector in the global economy in the last two decades, providing more than 60 per cent of global output and, in many countries, an even larger share of employment. The rising share of services in world transactions has also accompanied the growth in services. Testimony to the rise in international supply of services is the fact that trade in services has grown as fast as trade in goods in the period (1991-2011). Along with this, worldwide there has been a marked shift of FDI away from manufacturing sector towards service sector. The share of services in total FDI stock has now increased to around 60% since 2000 as compared to less than half in 1990 and only one quarter in 1970s. In line with the global trend, service sector in India has also grown rapidly in the last decade. Its growth has in fact been higher than the growth in agriculture and manufacturing sector. It now contributes around 51 per cent of GDP. In the trade mode, services trade has also grown at the same rate as goods trade over the 1990s (i.e., about 6.5 per cent) and its share in total trade has reached around 24 per cent. India’s growth rate has been remarkable after the liberalization and Economic Reform in 1991. The Service Sector in India has played a central role in this growth story. Indian service sector has experienced unprecedented growth during the last two decades. Service-led growth is a common phenomenon in the theory of economic growth (Clark, 1940; Kuznets, 1957; Chenery, 1960). But traditionally, the service-led growth has been associated with the tertiary phase of growth, where a major part of the demand for service comes from the developed manufacturing sector (the secondary sector). But Indian growth has been an altogether different story. The growth of Indian service sector is largely independent of the manufacturing sector. India, in its process of growth has been able to bypass the stage of manufacturing-sector led growth and reached straight into the third stage – service led growth. This pattern of Indian growth is distinctly dissimilar from the growth pattern of its Asian peers namely Vietnam, Indonesia, China, Thailand, Malaysia and Korea. While for these Asian countries, export oriented manufacturing sector has been instrumental in the growth, in India, the dominant services sector, led by information technologies and information technology enabled services has grown faster than all other countries in the last three decades (Walters, Stapleton and Andrews, 2007). This fast-growing sector has always been crucial in Indian economic growth. Trade in services has grown more rapidly than merchandise trade. Information technology and business process outsourcing are among the fastest growing sectors in terms of services export. FDI is widely viewed as being one of the principal vehicles for the international transfer of technology. FDI results in increase in productive capital stock, technological growth, and facilitates transfer of managerial skills, besides improving global market access. The significant impact of these flows on export expansion has generated a keen interest in exploring the linkages between FDI and exports. In spite of the wide-ranging FDI-services and extensive trade-and services linkages, there is relatively little empirical work examining the impact of FDI on services export. On the other hand, the impact of FDI on commodity export have been studied and documented extensively. So, an attempt is made to study the impact of FDI inflows on services export during the post liberalization period. Role of FDI in India’s Service Sector The Service Sector has played a dominant role in the Indian Economy with a 57.3 per cent share in the GDP and a growth of 10.1 per cent in 2009 -10 (Economic Survey 2010-2011, RBI). Foreign Direct Investment (FDI) has been instrumental behind the growth of service sector in India. Since the opening up of the economy in 1991, FDI in India has grown in leaps and bound. From a mere 45.46 million dollars in 1970, FDI has grown into a mammoth 40418.39 million dollars in 2008. The FDI inflow between 1991 and 2008 had increased by a staggering 53791.2 million dollars. A substantial part of the FDI has gone into the service sector. In addition, FDI’s contribution to this sector has only grown overtime. The flow of FDI in Indian service sector has boosted the growth of Indian economy; this sector has Journal of Business Management & Social Sciences Research (JBM&SSR) ISSN No: 2319-5614 Volume 2, No.11, November 2013