Foreign Direct Investment and Economic Growth in South Asian Region

Abstract

This study attempts to investigate the determinants of foreign direct investment and the influence of inward foreign direct investment over economic growth in South Asian region. Having identified the gap of analysis of previous literature in this regard, this study was carried out using panel data for the period 1980-2010, adopting panel least square method. Results of the study indicated that there is a significant positive influence of foreign direct investment over economic growth in the South Asian region. The gross domestic product, size of the government, population, gross domestic capital formation and human capital played a momentous role in determining foreign direct investment. To investigate the causality between foreign direct investment and economic growth, Pair-wise Granger Causality tests were employed that suggested the causality is bidirectional at 5% level of significance and uni-directional at 1% level of significance. Further, Pedroni Residual based Cointegration Test confirmed the existence of a long term influence of foreign direct investment over economic growth.