Determinants of FDI in South Asia

Abstract

After analysing FDI policies in Chap. 3 and inflows in Chap. 4, we empirically examine the major determinants of FDI inflows into South Asia in this chapter using both time series and panel data methodology over 1980–2010. The study considers both economic conditions, macroeconomic fundamentals, and institutional determinants. The analysis is very comprehensive in terms of methodology and modelling. First, time series properties of the variables are established by using ADF unit test. In the second stage, co-integration or long-run relationship between FDI and its determinants are established by using both ARDL and Westerlund (Oxford Bull Econ Stat, 69:709–748, 2007) panel error correction method. In the third stage, long-run determinants of FDI are estimated by using both ARDL method and GMM system method. Overall, the analysis shows that the determinants of FDI for South Asia can be grouped under two categories: (1) economic conditions such as market size, rate of return, labour cost, human capital, physical infrastructure, and macroeconomic fundamentals such as current account balance and (2) host country policies such as trade openness, exchange rate, and governance. Trade agreements (both bilateral and multilateral) are other important determinants of FDI inflows to South Asia.