Factors influencing foreign direct investment in South Asian economies

Abstract

Purpose The purpose of this paper is to investigate the macroeconomic determinants of foreign direct investment (FDI) for the top five South Asian economies, namely, Bangladesh, India, Pakistan, Sri Lanka, and Nepal, and to examine whether these factors are the same for each. Design/methodology/approach This study employs fully modified ordinary least squares and two-stage least squares estimation methods. Findings This study shows that South Asian economies have a number of FDI determinants in common. For example, market size and human capital are the two most common factors attracting FDI in each country (except for Nepal, which revealed a negative correlation between FDI and market size). Other factors, such as infrastructure, domestic investment, lending rates, exchange rates, inflation, financial stability/crisis, and stock turnover entered into regression with both positive and negative signs, thereby indicating that the underlying theories on FDI do not provide a clear prediction of the direction of the effect of a particular variable on FDI. Research limitations/implications This paper studied the effects of demand-side factors on FDI. A comparative study of the supply-side factors may add further knowledge. Practical implications This paper provides evidence to show that the determinants of FDI are indeed country-specific. Thus, to design a suitable FDI policy, it would not be wise to solely rely on other economies’ FDI experiences. Originality/value This paper provides updated evidence on factors that are essential to promoting or deterring FDI in South Asian economies.