Determinants and Growth Effect of FDI in South Asian Economies: Evidence from a Panel Data Analysis

Abstract

This empirical study investigates the determinants and growth effect of FDI in case of four South Asian countries over the period of 1995-2008. It comprises two major analytical parts. Firstly, we incorporate a gravity model equation in order to investigate potential determinants of foreign direct investment in these countries. Secondly, we use a growth model equation to investigate growth effect of foreign direct investment in the countries. For both analyses, we use panel data and employ Arellano-Bond dynamic panel system method of moment estimator. The results derived from this study suggest that: (1) the pulling, pushing and cyclical factors are crucially important in determining FDI in South Asian countries; (2) foreign direct investment in South Asian countries is significant and positively associated with growth rate, but seems to be having average supportive to the growth rate in these countries.