Foreign direct investment and export performance using the hierarchical Bayesian vector autoregression framework

The paper investigates the interrelationship between the exports (EXP) and foreign direct investment (FDI) inflows with reference to the Indian pharmaceutical industry. It employs the hierarchical Bayesian vector autoregression (BVAR) framework, which is known to generate accurate out‐of‐sample predictions by selecting appropriate amount of shrinkage and tighter priors. It also performs well in terms of accuracy of the impulse response functions in identified VARs. A unidirectional positive impact from FDI to EXP has been found from the impulse responses drawn from the BVAR model. This result is most likely because most of the Indian pharma multinational corporations (MNCs) infuse their foreign investments to boost EXP from India.