Foreign Direct Investment (FDI) and Economic Growth in South Asia

Abstract

The present chapter presents analysis of the relationship between FDI and economic growth in South Asia using both time series and panel data analysis using annual data during the period 1980–2010. The analysis has been done in growth accounting framework where most of the important growth variables such as labour, capital, trade openness, human capital, infrastructure development, financial sector development, quality of institutions, macroeconomic instability, and productivity of investment are used. The analysis also tests the absorption hypothesis that the growth impact of FDI in any country is conditioned by the overall health of that country’s economy. The long-run coefficients of real per capita income were estimated using the ARDL model for all five countries. The results indicate that the coefficient of FDI is small but positive and significant for all countries except Nepal. This is further confirmed by panel results that FDI has a positive impact on the economic growth in the sample of five countries. Overall, the above results confirm that the impact of FDI on a country’s economic growth is determined by trade openness, human capital, gross capital formation, financial development, infrastructure development, and LF. Therefore, to augment economic growth, South Asian governments should identify the factors that have a positive relationship with FDI and focus on them.