The Determinants of Inward FDI in SAARC Countries: Evidence from a Time Series data Analysis

Abstract

As South Asian Countries have location advantage, this study examines the impact of  economic, social and political factors on inward foreign direct investment into Pakistan, India and Bangladesh using a time series data for the period 1991- 2010. The set of macro-economic determinants are market size measured by GDP and market potential measured by per capita GDP, exchange rate measured by real effective exchange rate, macroeconomic stability measured by inflation and trade openness measured by the ratio of trade to GDP, political instability measured by political index taken from polity IV. Social determinants are cost of capital measured by real interest rate and quality of physical infrastructure measured by internet users (per 100 people). The paper highlights the finding that macroeconomic stability is insignificant variable for Pakistan and Bangladesh. Infrastructure is statically and economically significant variable for India, while market size is a significant variable for India but not for Bangladesh. Political instability is insignificant variable for India and Bangladesh. This paper fills the gap by identifying the common location advantage variables for FDI inflows between Pakistan, India and Bangladesh.

Key words: macroeconomic stability, trade openness, political index