FDI, Foreign Debt, and Economic Growth: The South Asian Perspective (1980-2020)

Abstract

The present study examines the intricate relationship between foreign direct investment (FDI), foreign debt, and economic growth over the period of 1980 to 2020 in the following countries: India, Pakistan, Sri Lanka, Bangladesh, Nepal, Maldives, and Bhutan. The analysis utilizes data obtained from the World Bank, with productive projects, improved technology and expertise, technological transfer, foreign direct investment (FDI), export, import, and productive projects serving as independent variables. GDP growth is considered as the dependent variable. The model is subjected to rigorous testing procedures, which include the Fisher-Type ADF (for panel unit root), co-integration tests, histogram-based normality assessment, White test for heteroscedasticity, VIF (variance inflation factor) test for multicollinearity, and F-test for parameter significance. These procedures are implemented to ensure the model's robustness. Subsequent analysis is guided by the Hausman test's preference for the Fixed Effects (FE) model over the Random Effects (RE) model. It is worth noting that in both the FE and RE models, a negative correlation is observed between foreign debt and economic growth. The foreign direct investment (FDI) growth rate is inversely proportional to the growth rate of economic output (0.025 percent) and foreign debt (0.117 percent), according to the FE model. The interdependence of foreign direct investment (FDI) and foreign debt underscores the criticality for developing countries to effectively manage their foreign debt while facilitating FDI inflow. The research emphasizes that policy frameworks in these nations must reduce foreign debt in order to create an environment that is favorable for greater foreign direct investment.