A Study On The Impact Of Foreign Direct Investment On The Economic Growth Of SAARC Countries

Md. Rasul Kazi, Abdus Samad Azad

Abstract


Foreign direct investment (FDI) is an important factor in the economic development of any country. Many factors affect the growth rate of the national economy due to FDI. When FDI enters the host country, it generates a large number of business opportunities. The employment opportunities for employees in the host country will also increase, thereby reducing the unemployment rate and ultimately increasing its GDP growth rate. By obtaining foreign investment, enterprises can expand their business to various parts of the world, and infrastructure in different fields will also be developed, all of which will affect economic expansion. Therefore, this article conducted a study to determine the impact of FDI on the economic growth of the South Asian Association for Regional Cooperation countries.

This article first analyzes the current characteristics of FDI and economic growth in SAARC countries. Research has found that FDI and GDP growth in SAARC countries vary. India's FDI peaked at $64.66 billion in 2020 and then declined. In 2022, FDI in Bangladesh and Afghanistan increased to $1.56 billion and $13 billion respectively. Sri Lanka, Pakistan, and Nepal decreased to $1.08 billion, $1.34 billion, and $95 billion respectively, while Bhutan and Maldives had almost no FDI. In addition, there are significant differences in the growth of gross domestic product among the countries of the South African Union, reflecting economic difficulties and recovery.

Then, a theoretical analysis was conducted on the impact of FDI on economic growth from both direct and indirect perspectives. Research has found that FDI can directly cause capital shocks and indirectly affect the host country's economic growth by influencing other economic factors. FDI will directly or indirectly increase exports, compensate for the shortage of import funds in developing countries, and establish an external economic balance.

Subsequently, using data from 2013 to 2022, selected export size, import size, inflation rate, and unemployment rate as control variables, and used empirical methods such as ordinary least squares (OLS), random effects model, fixed effects model, and feasible generalized least squares (FGLS) to analyze the impact of FDI on the economic growth of SAARC countries. Through empirical results, it was found that FDI has a significant positive impact on the economic growth of SAARC countries. The larger the scale of FDI, the higher the economic growth rate. Therefore, it can be said that FDI is an important contributor to the growth rate of the national economy.

Finally, based on the above analysis, the following policy implications can be drawn: the host country needs to simplify various types of regulatory requirements to establish and operate enterprises; Take protective measures to address various concerns of foreign investors regarding legal issues and disputes; Strengthen vocational training and appropriate education to cultivate a skilled and adaptable workforce; Provide some tax incentives and exemption policies; Improve industrial structure, enhance human capital level, and enhance competitiveness to better attract FDI, the government needs to further expand the economic sectors that are open to the outside world and improve the overall internationalization level of the economy.

Keywords


FDI, Economic Growth, SAARC Countries, FGLS

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References


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DOI: http://dx.doi.org/10.52155/ijpsat.v58.2.8452

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