Impact of Foreign Direct Investment on Economic Growth of the SAARC Countries

Abstract

Empirical evidence suggests FDI has both growth enhancing and growth diminishing impact on the economic growth. The endogenous growth model supports the view that FDI has significant impact on improving human capital, managerial skills, research and development which in effect improve economic growth. However, “The dependency school theory” argues that importing foreign capital from developed countries is harmful in the long-run for the developing economies. This in effect causes distortion, hinders growth, and increases income inequality in developing countries. In this context, the impact of FDI on economic growth of SAARC and its member states has been investigated. For the purpose of investigation positivism philosophy, deductive approach and cross-sectional research design has been employed. Secondary data for the period of 2000-2014 for FDI (independent variable) and GDP, Total export, Inflation (dependent variables) has been collected from UNCTADstat database and analysed using correlation and regression analysis. The finding shows that FDI has significant impact on economic growth of SAARC region. For individual member states FDI is also found to be a significant factor for accelerating economic growth for all the countries with exception for Afghanistan and Pakistan. Therefore, this research recommends taking more initiative by the individual countries to attract more FDI through making FDI friendly policies, reducing tax and tariffs to accelerate economic growth.

Keywords: Foreign Direct Investment, Economic growth, SAARC economy