Determinants and Competitiveness of Indo-Canadian Bilateral Trade

Abstract

Using augmented import and export demand functions, the paper examined the determinants and competitiveness of Indo-Canadian bilateral trade during 1996 second quarter to 2010 first quarter. They were estimated by including Canadian FDI inflows and exchange rate volatility, along with the traditional variables (viz., relative prices and real income) as explanatory variables. Further, ARDL model was used to estimate long and short-run relationships among the variables. The results revealed that the traditional variables responded well to import demand, rather than to export demand. While Canadian FDI inflow had marginal effect on India’s short run export demand, no such long run influence could be traced. Exchange rate volatility exercised positive effect on export demand in both the long and short-run, but revealed marginal negative effect on import demand in both the periods. Thus, the study indicated high scope for bilateral trade and FDI flows between India and Canada.

Keywords: bilateral trade, import demand function, export demand function, exchange rate volatility, foreign direct investment

JEL Classification: F14, F21