The Nexus Between Institutional Quality and Foreign Direct Investments (FDI) in South Asia: Dynamic Heterogeneous Panel Approach

The Nexus Between Institutional Quality and Foreign Direct Investments (FDI) in South Asia: Dynamic Heterogeneous Panel Approach

Mohammad Ashraful Ferdous Chowdhury
DOI: 10.4018/978-1-7998-2448-0.ch029
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South Asia is one of the world's fastest growing regions, averaging 6.7 percent annual increases in real GDP over the past decade. However, South Asia's FDI inflows as a share of GDP are the lowest of all developing regions, averaging less than 2 percent in 2000-11(World Bank, 2013). Institutional quality is one of the factors that determine the volume of FDI inflow in any country. This study covers the data of three sampled countries of South Asia provided by the World Bank for the period 2003-2014. By using both static and dynamic models, this study reveals that regulatory quality and the political stability have significantly positive impact on the FDI inflow into each of the three countries. For Robustness, this study also employs dynamic heterogeneous panel approaches like Pool Mean Group (PMG) and found that institutional quality factors are significantly relevant to the FDI. As a policy implication, the regression results indicate that during the process of reform, the relation between FDI and institutional quality warrants a certain amount of attention.
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Present Status Of Fdi In Selected South Asian Countries

Like many other developing countries, South Asian nations have been experiencing increased FDI inflows over the past decade as developing countries get a larger share of cross-border investments once sent to developed countries. Nonetheless, South Asia’s FDI inflows remain the lowest relative to GDP among developing country regions. Of the inflows that do reach South Asia, India dominates, with much of the inflow reaching the service sector and very little going into industry, agriculture, or mining.

This series shows in Figure 1 net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP. Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.

Figure 1.

FDI percentage to GDP in subcontinents

Source: World Bank.

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