Determinants of FDI in South Asia: Role of Infrastructure, Trade Openness and Reforms

Abstract

The Foreign Direct Investment (FDI) environment underwent a sea change in South Asian countries during the 1990s, and more so in recent years. Though FDI inflows to South Asian countries have witnessed increasing trends, FDI inflow is still relatively low. In this context, the paper examines the determinants of FDI for South Asian countries with emphasis on infrastructure development, trade openness and reforms. The results reveal that major determinants of FDI in South Asia are market size, labor force, infrastructure stock, trade openness and economic reforms. Further, the panel causality analysis shows that there is a strong relationship between infrastructure development and FDI inflows. Therefore, the South Asian countries need to maintain their growth momentum, improve infrastructure facilities, frame policies for better use of abundant labor force and continue economic reforms with focus on trade policies to attract more FDI.