Open Skies, Air Connectivity and India’s Outward FDI

The present study addresses the question—‘does host-country air connectivity influence India’s outward foreign direct investment (OFDI)?’ The findings show that host-country air connectivity is a significant determinant of India’s OFDI. Yet, the effect is not uniform; further analysis reveals that the responsiveness of OFDI to improvements in air connectivity differs across different distance bands and over time. Furthermore, the study employs a quasi-natural experimental approach to examine the impact of the Open Sky policy introduced under India’s National Civil Aviation Policy 2016 on OFDI from India. The results provide evidence of a positive impact of the policy only on grant-based OFDI. In addition, the study examines the impact of the bilateral Air Service Agreement on OFDI and finds a significant effect. A regional analysis further reveals that the effect of improved air connectivity is heterogeneous across destination regions. Moreover, the study explicitly addresses potential endogeneity by employing an instrumental variable approach, using ‘terrain ruggedness’ as the instrument. Overall, the study contributes to the empirical literature by providing firm-level evidence from a major emerging economy, an area that remains relatively underexplored.