The Impact of FinTech and Digital Transformation on Foreign Direct Investment and Bilateral Trade in Financial Services: The Case of the UK and India 1

Abstract

The rapid digitisation of financial markets has significant implications for international trade and the global provision of financial services. This study examines the evolving role of FinTech and automation in reshaping global supply chains, focusing on the UK and India. While the UK leads in exports of financial services, India has established itself as a major player in ICTrelated exports, bolstered by its growing FinTech capabilities. We explore how the increasing reliance on digital technologies, artificial intelligence, and internet-based financial services is altering the traditional dynamics of Foreign Direct Investment (FDI) and bilateral trade in financial services. Specifically, we assess whether FinTech-driven FDI complements or substitutes cross-border trade in financial services between these two economies. Our analysis is informed by empirical data on FDI flows, trade in services, and the FinTech ecosystem, utilising sectoral classifications from FDI Markets, OECD trade statistics, and Tracxn startup data. By applying econometric modelling and qualitative insights from industry interviews, we identify key factors driving FDI decisions in FinTech and assess their impact on trade patterns. Findings suggest that FinTech FDI is increasingly substituting traditional trade in financial services, particularly in the UK-India corridor. Regulatory barriers, market saturation, and an increasing preference for local market presence by financial service providers drive this shift. The study underscores the necessity for policymakers to consider the implications of digital transformation on trade policies and investment strategies, significantly as financial globalisation accelerates in the digital realm age.