Foreign Direct Investment (FDI) and Economic Reforms: The South Asian Perspective

Abstract

Foreign Direct Investment (FDI) flow in the economies of South Asia has not been satisfactory. However, these countries got an upward shift in their inward FDI flow after they had started to liberalize their economies in the 1980s. This paper examines some aspects of FDI flow in four major South Asian economies namely Bangladesh, India, Pakistan and Sri Lanka. Various trends of FDI flow to these countries are analyzed using recent data. An empirical estimation of the impact of economic liberalization reforms on inward FDI flow of these countries is conducted using a data set ranging from 1991 to 2012 by the panel fixed effect model. The empirical findings of the paper suggest that trade liberalization, capital market liberation and fiscal reforms are positively correlated with FDI flow. This study suggests that economic liberalization reforms need to be continued in these countries in order to support more and more FDI flows.

Keywords: FDI, economic liberalization reform, South Asia and panel fixed effect model