Macroeconomic Impact of Foreign Direct Investment: A Study on SAARC Countries

Abstract

With the greater integration of world economy foreign direct investment (FDI) has become a very common feature in almost every countries of the world. But, there is a trend of these FDI flows to be directed towards the developing nations because of emerging opportunities and huge market potentials. However, there are a lot of debates about the contribution of FDI in the developing economies. Therefore this study is intended to measure the macroeconomic impact of FDI in SAARC countries. This study has selected six macroeconomic variables: gross domestic product, inflation, current account balance, government revenue, total foreign exchange reserve and gross capital formation to test the impact of FDI on them. Required data have been collected from the websites of World Bank and International Monetary Fund for a period of 11 years from 2002 to 2012 and analyzed applying correlation and simple regression methods using SPSS 16.0. From the analysis this study has found that if FDI flows into a country increase, the level of gross domestic product, inflation, government revenue, foreign reserve and gross capital formation of that country are also expected to be increased. On the other hand, if FDI increases, current account balance is expected to be decreased in a country.

Keywords: FDI, gross domestic product, inflation, current account balance, government revenue, foreign exchange reserve, gross capital formation.