Role of FDI Inflows in Spurting National Investment in South Asia: Evidences from Panel Data Analysis

Abstract

South Asian countries have emerged as favoured destinations for foreign investors during 90’s. The phenomenal growth in Foreign Direct Investment (FDI) of the economies can be attributed to the active government promotion through various policy measures. Often it is observed that FDI in host countries deviate much from the expected role of promotion of domestic investment and instead it results in harmful effect of displacement of domestic investment. While considering the divergent pattern of FDI inflows, Gross Domestic Product as well as domestic investment in various countries of South Asia, it is pertinent to have an analysis of these factors. In order to verify the authenticity of it, a detailed analysis is done with the help of methodology used by Agosin and Mayor (2000) by making use of panel data ranging from 1990 onwards in the case of South Asian countries. The World Bank data expressed in constant prices in US$ at 2005 year base is put to use. Three variables such as FDI, Gross Domestic Product (GDP) and Domestic Investment (DINV) are considered for the analysis. The results are verified with the help of different mathematical techniques appropriate for panel data analysis so as to highlight the response of Domestic Investment as per increase in FDI inflows.