What determines China’s FDI inflow to South Asia?

Abstract

This study investigates empirically the determinants of China’s outward foreign direct investment in South Asia. Our estimation results based on the panel data for five South Asian economies (Bangladesh, India, Nepal, Pakistan and Sri Lanka) over the period 2003 to 2012. POLS method is used for estimation of model after conducting Hausman specification and Lagrangian Multiplier (LM) tests. This paper highlights the findings that macroeconomic variables such as infrastructural facilities, inflation, bilateral trade, market potential and trade openness have significant and positive impact on FDI inflow. Among the institutional variables, level of corruption is highly significant and negatively associated with inflow of Chinese FDI. This empirical study has some policy implications for policy makers. To attract further Chinese FDI, South Asian economies should step forward and opt incremental efforts to remove all trade barriers, reduce corruption and build appropriate institutions. Policies and economic strategies should aim at liberalizing trade structure, reducing macroeconomic instability and provision of better infrastructural facilities to attract further Chinese FDI into South Asia.