FACTORS INFLUENCING THE FOREIGN DIRECT INVESTMENT IN …

FACTORS INFLUENCING THE FOREIGN DIRECT

INVESTMENT IN THE COUNTRIES OF THE

SAARC REGION

Synopsis submitted to Madurai Kamaraj University

for award of the Degree of

DOCTOR OF PHILOSOPHY IN ECONOMICS

by

M.TAMIZHARASAN

Reg.No: F9653

Under the Supervision and Guidance of

Dr. S.V.HARIHARAN, M.A., M.Sc., A.M.A., Ph.D.

SCHOOL OF ECONOMICS

MADURAI KAMARAJ UNIVERSITY

MADURAI –625 021

TAMIL NADU

INDIA

AUGUST 2019

2

FACTORS INFLUENCING THE FOREIGN DIRECT

INVESTMENT IN THE COUNTRIES OF THE SAARC

REGION INTRODUCTION

Foreign Direct Investment (FDI) in developing economies is reaching a high level of 794

billions of US Dollar in 2017, which accounts for 61 per cent of global FDI inflows. The

Developing Asia is the largest FDI recipient region in the world. Since economic reforms

initiated in 1991, the liberalization policy of FDI has affected the magnitude and the pattern of

FDI inflows received by the countries of the SAARC Region. There was a challenge for SAARC

countries to receive FDI through the geopolitical risks, global financial markets and depreciation

of currencies in international markets, regional tensions and border problems in the SAARC

Region.

South Asian Association Regional Cooperation (SAARC) is an organization of South

Asian Nations, founded in 1985. It had seven founding members namely, Bangladesh, Bhutan,

India, Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan joined the organization later in

2007. One-fifth of the world population lives in SAARC countries. Within this area, almost half

of the population lives below the poverty line making it one of the poorest region of the world.

The areas of the SAARC region have trade cooperation in external markets and regional

geographical conflicts with regard to the problems of the border and political intervention. A

precondition for successful integration among the SAARC countries is a diffusion of political

tensions so that regional economies can jointly utilize the available resources.

Most of the research works have shown that the amount of FDI received depends on a

number of determining factors. A few of the most important determinants of foreign direct

investment is the population from which we can determine the market size as well as the growth

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prospect of the host country. Therefore, FDI flows in developing countries are higher than the

flows in developed countries.

Statement of the Problem

SAARC countries have opened up their economies for trade and investment. They are

receiving very low FDI compared to other developing countries. This research work empirically

analyzes the issues and factors influencing the FDI in the countries of SAARC Region. Since

South Asian countries have been following export-led growth strategy and trying to attract FDI,

the study would examine some important variables influencing the FDI in South Asian countries.

There is also a scope to carry out research on issues such as labour reforms as a major

determinant of FDI in South Asian countries and also on employment related FDI strategy in

countries like India where unemployment problem has been persistent for several decades.

The region suffers from massive Balance of payments burden, mass unemployment, high

level of population, large poverty, low rate of economic growth, constant food shortage,

worsening terms of trade, large illiterate and also the least gender sensitive region of the global

level.

Objectives of the Study

The objective of this study is to analyse the factors affecting the foreign direct investment

in the countries of the SAARC region. However the following are the specific objectives of the

present study:

1. To study the Growth of FDI of countries of the SAARC Region.

2. To study the position of SAARC Countries at regional and global level in terms of

FDI

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3. To study the FDI – GDP Ratios of the countries of the SAARC Region and to

study the distribution of the FDI among the countries of the SAARC Region.

4. To identify the important factors influencing the FDI inflows in the Countries of

the SAARC Region.

5. To identify the factors influencing the FDI inflows for the SAARC Region as a

whole.

Methodology

For the present study SAARC countries are taken for analysis. The SAARC countries are:

Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri lanka. Data on the

relevant macro economic variables are not available for Bhutan for some period. Hence it

included for the study on 2001 to 2015. The study will cover a period of 25 years from 1991 to

2015. This study had been divided into two sub periods: 1991 to 2000 and 2001 to 2015. This

study is based on the secondary data. Annual data on Foreign Direct Investments, Foreign direct

investment inflows, Gross Domestic Product, Trade Openness, Labour Force, Consumer Price

Index, Exchange Rate, Gross Capital Formation, Real Interest Rate, Infrastructure, Gross

Enrollment Ratio, GDP per capita, Corporate Tax Rate and Current account balance of

payments are mainly required for the study. The necessary data are obtained from the various

issues of database of United National Conference on Trade and Development [UNCTAD],

World Development Indicators [World Bank], World Investment Report, The Worldwide

Governance Indicators [WGI], International Financial Statistics [IFS] and Statistical Handbook

of various issues in different Countries of the SAARC Region.

The average annual increase in FDI is measured in different countries of the SAARC

region, the distribution of FDI has been studied through percentage analysis. The growth of FDI

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is assessed through Index Numbers, Annual Growth Rate and Percentages. To study the

relationship between FDI and some important macro economic variables, multiple linear

regression models will be tested by taking FDI as the independent variable and macro economic

variables as dependent variables. The present study has used the Panel Unit Root Test and Panel

Regression Analysis to identify the factors influencing FDI at Regional level.

Important of Findings

Growth of FDI Inflows in Afghanistan

The growth of foreign direct investment inflows in Afghanistan was -0.28 Million of US

Dollars in 1991 and it reached 0.17 Million of US Dollars in 2000. The growth of foreign direct

investment inflows in Afghanistan has decreased -0.61 Million of US Dollars annually. The

value of foreign direct investment was 0.68 Million of US Dollars in 2001 and it reached 58

Millions of US Dollars in 2015. The growth of foreign direct investment inflows in Afghanistan

has increased by 85.29 Million of US Dollars annually. The annual growth rate is 0.03 per cent

during this period.

Growth of FDI Inflows in Bangladesh

The value of foreign direct investment inflows in Bangladesh was 1.39 Millions of US

Dollars in 1991 and it reached 578.64 Millions of US Dollars in 2000. The growth of foreign

direct investment inflows in Bangladesh have increased by 416.29 Million of US Dollars

annually. The annual growth rate is decreased 0.57 per cent during this period. The value of

foreign direct investment inflows was 354.47 Millions of US Dollars in 2001 and it reached

2235.39 Millions of US Dollars in 2015. The growth of foreign direct investment inflows in

Bangladesh has increased by 6.31 Million of US Dollars annually. The annual growth rate is

increased 1.14 per cent during this period.

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Growth of FDI Inflows in Bhutan

The value of foreign direct investment inflows in Bhutan was 0.60 Millions of US

Dollars in 1991 and it reached 1.05 Millions of US Dollars in 1999. The growth of foreign direct

investment inflows in Bhutan has increased by 1.75 Million of US Dollars annually. The annual

growth rate is 1 per cent during this period. The value of foreign direct investment inflows in

Bhutan was 2.43 Millions of US Dollars in 2002 and it reached 12.09 Millions of US Dollars in

2015 with fluctuations. The growth of foreign direct investment inflows in Bhutan has increased

by 4.97 Million of US Dollars annually.

Growth of FDI Inflows in India

The foreign direct investment inflows in India was 75 Millions of US Dollars in 1991 and

it reached 3587.99 Millions of US Dollars in 2000. The growth of foreign direct investment

inflows in India has increased by 47.84 Million of US Dollars annually. The annual growth rate

is decreased 0.28 per cent during this period. The value of foreign direct investment in India was

5477.64 Millions of US Dollars in 2001 and it reached 44208.02 Millions of US Dollars in 2015.

The growth of foreign direct investment inflows in India was increased by 8.07 Million of US

Dollars annually. The annual growth rate is decreased 50.50 per cent during this period.

Growth of FDI Inflows in Maldives

The value of foreign direct investment inflows in Maldives was 6.50 Millions of US


direct investment inflows in Maldives has increased by 3.42 Million of US Dollars annually. The

annual growth rate is 52.60 per cent during this period. The value of foreign direct investment

inflows in Maldives was 20.50 Millions of US Dollars in 2001 and it reached 323.87 Millions of

US Dollars in 2015. The growth of foreign direct investment inflows in Maldives has increased

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by 15.79 Million of US Dollars annually. The annual growth rate is 0.36 per cent during this

period.

Growth of FDI Inflows in Nepal

The value of foreign direct investment inflows in Nepal was 2.22 Millions of US Dollars

in 1991 and it reached -0.48 Millions of US Dollars in 2000. The growth of foreign direct

investment inflows in Nepal has decreased by 0.21 Million of US Dollars annually. The annual

growth rate is 1.11 per cent during this period. The value of foreign direct investment inflows in

Nepal was 20.85 Millions of US Dollars in 2001 and it reached 51.44 Millions of US Dollars in

2015. The growth of foreign direct investment inflows in Nepal has increased by 2.47 Million of

US Dollars annually.

Growth of FDI Inflows in Pakistan

The value of foreign direct investment inflows in Pakistan was 271.92 Millions of US

Dollars in 1991 and it increased and it reached 309 Millions of US Dollars in 2000. The growth

of foreign direct investment inflows in Pakistan has increased by 1.14 Million of US Dollars

annually. The value of foreign direct investment inflows in Pakistan was 383 Millions of US


direct investment inflows in Pakistan has increased by 2.26 Million of US Dollars annually.

Growth of FDI Inflows in Sri Lanka

The value of foreign direct investment inflows in Sri Lanka was 67 Millions of US


direct investment inflows in Sri Lanka has increased by 2.61 Millions of US Dollars annually.

The value of foreign direct investment inflows in Sri Lanka was 81.89 Millions of US Dollars in

2001 and it reached 681.24 Millions of US Dollars in 2015. The growth of foreign direct

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investment inflows in Sri Lanka has increased by 8.32 Millions of US Dollars annually. The

annual growth rate is 0.45 per cent during this period.

Position of Afghanistan in terms of FDI

The share of Afghanistan in South Asia was -0.0626 per cent in 1991 and it increased to

0.0035 per cent in 2000. The highest share is 0.1895 per cent in 1999. The share of Afghanistan

in Asia was -0.0011 per cent in 1991 and it decreased to 0.0001 per cent in 2000. The highest

share is 0.0052 per cent in 1999. The share of foreign direct investment in developing countries

was -0.0007 per cent in 1991 and it increased to 0.0001 per cent in 2000. The highest share is

0.0028 per cent in 1999. The share of Afghanistan in world FDI was -0.0002 per cent in 1991

and it was to 0.0000 per cent in 2000. The highest share is 0.0006 per cent in 1999.

The share of Afghanistan in South Asia was 0.0101 per cent in 2001 and it increased to

0.1149 per cent in 2015. The highest share is 1.9109 per cent in 2005. The share of foreign direct

investment in Asia was 0.0006 per cent in 2001 and it increased to 0.0111 per cent in 2015. The

highest share is 0.1205 per cent in 2005. The share of Afghanistan in developing countries was

0.0003 per cent in 2001 and it increased to 0.0077 per cent in 2015. The highest share is 0.0797

per cent in 2005. The share of Afghanistan in world FDI was 0.0001 per cent in 2001 and it

increased to 0.0033 per cent in 2015. The highest share is 0.0285 per cent in 2005.

Position of Bangladesh in terms of FDI

The share of Bangladesh in foreign direct investment in South Asia was 0.31 per cent in

1991 and it increased to 11.89 per cent in 2000. The highest share is 14.68 per cent in 1998. The

share of Bangladesh in Asia was 0.01 per cent in 1991 and it increased to 0.41 per cent in 2000.

The highest share is 0.62 per cent in 1998. The share of Bangladesh in developing countries was

0.0035 per cent in 1991 and it increased to 0.2475 per cent in 2000.The highest share is 0.3294

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per cent in 1998. The share of Bangladesh in world investment was 0.0009 per cent in 1991 and

it increased to 0.0426 per cent in 2000. The highest share is 0.1195 per cent in 1997.

The share of Bangladesh in South Asia was 5.2536 per cent in 2001 and it increased to

4.4279 per cent in 2015. The highest share is 5.9600 per cent in 2005. The share of Bangladesh

in Asia was 0.2889 per cent in 2001 and it increased to 0.4296 percent in 2015. The highest share

is 0.3794 per cent in 2013. The share of Bangladesh in developing countries was 0.1636 per cent

in 2001 and it increased to 0.2971 per cent in 2015. The highest share is 0.2971 per cent in 2015.

The share of Bangladesh in world FDI was 0.0518 per cent in 2001 and it increased to 0.1269 per

cent in 2015. The highest share is 0.1269 per cent in 2015.

Position of Bhutan in terms of FDI

The share of Bangladesh in foreign direct investment in South Asia was 0.31 per cent in

1991 and it increased to 11.89 per cent in 2000. The highest share is 14.68 per cent in 1998. The

share of Bangladesh in Asia was 0.01 per cent in 1991 and it increased to 0.41 per cent in 2000.

The highest share is 0.62 per cent in 1998. The share of Bangladesh in developing countries was

0.0035 per cent in 1991 and it increased to 0.2475 per cent in 2000.The highest share is 0.3294

per cent in 1998. The share of Bangladesh in world investment was 0.0009 per cent in 1991 and

it increased to 0.0426 per cent in 2000. The highest share is 0.1195 per cent in 1997.

The share of Bhutan in South Asia was 0.0229 per cent in 2002 and it increased to 0.0239

per cent in 2015. The highest share is 0.2524 per cent in 2006. The share of Bhutan in Asia was


per cent in 2006. The share of Bhutan in developing countries was 0.0014 per cent in 2002 and it

increased to 0.0016 per cent in 2015. The highest share is 0.0175 per cent in 2006. The share of

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Bhutan in world FDI was 0.0004 per cent in 2002 and it increased to 0.0007 per cent in 2015.

The highest share is 0.054 per cent in 2010.

Position of India in terms of FDI

The share of India in South Asia was 16.78 per cent in 1991 and it increased to 73.73 per

cent in 2000. The highest share is 76.38 per cent in 1995. The share of India in Asia was 0.3079

per cent in 1991 and it increased to 2.5126 percent in 2000. The highest share is 3.3420 per cent

in 1997. The share of India in developing countries was 0.1908 per cent in 1991 and it increased

to 1.5345 per cent in 2000. The highest share is 1.9521 per cent in 1997. The share of India in

world investment was 0.0487 per cent in 1991 and it increased to 0.2641 per cent in 2000. The

highest share is 0.7516 per cent in 1997.

The share of India in South Asia was 81.1846 per cent in 2001 and it increased to

87.5671 per cent in 2015. The highest share is 87.5671 per cent in 2015. The share of India in

Asia was 4.4642 per cent in 2001 and it increased to 8.4424 per cent in 2015. The highest share

is 12.4331 per cent in 2008. The share of India in developing countries was 2.5288 per cent in

2001 and it increased to 5.8762 per cent in 2015. The highest share is 7.9469 per cent in 2008.

The share of India in world FDI was 0.8011 per cent in 2001 and it increased to 2.5087 per cent

in 2015. The highest share is 3.1448 per cent in 2008.

Position of Maldives in terms of FDI

The share of Maldives in South Asia was 1.4543 per cent in 1991 and it decreased to

0.4575 per cent in 2000. The highest share is 0.1.4543 per cent in 1991. The share of Maldives in

Asia was 0.0267 per cent in 1991 and it decreased to 0.0156 per cent in 2000. The highest share

is 0.0267 per cent in 1991. The share of Maldives in developing countries was 0.0165 per cent in

1991 and it decreased to 0.0095 per cent in 2000. The highest share is 0.0165 per cent in 1991.

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The share of Maldives in world investment was 0.0042 per cent in 1991 and it decreased to

0.0016 per cent in 2000. The highest share is 0.0042 per cent in 1991.

The share of Maldives in South Asia was 0.3038 per cent in 2001 and it increased to

0.6415 per cent in 2015. The highest share is 1.0127 per cent in 2013. The share of Maldives in


is 0.0995 per cent in 2011. The share of Maldives in developing countries was 0.0095 per cent in


The share of Maldives in world FDI was 0.0030 per cent in 2001 and it increased to 0.0184 per


Position of Nepal in terms of FDI

The share of Nepal in South Asia was 0.4967 per cent in 1991 and it decreased to -0.0100

per cent in 2000. The highest share is 0.5669 per cent in 1996. The share of Nepal in Asia was

0.0091 per cent in 1991 and it decreased to -0.0003 per cent in 2000. The highest share is 0.0213

per cent in 1997. The share of Nepal in developing countries was 0.0056 per cent in 1991 and it

increased to -0.0002 per cent in 2000. The highest share is 0.0130 per cent in 1996. The share of

Nepal in world investment was 0.0014 per cent in 1991 and it decreased to 0.0000 per cent in

2000. The highest share is 0.0049 per cent in 1996.

The share of Nepal in South Asia was 0.3090 per cent in 2001 and it decreased to 0.1019

per cent in 2015. The highest share is 0.3090 per cent in 2001. The share of Nepal in Asia was


per cent in 2012. The share of Nepal in developing countries was 0.0096 per cent in 2001 and it

increased to 0.0068 per cent in 2015. The highest share is 0.0139 per cent in 2011. The share of

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Nepal in world investment was 0.0030 per cent in 2001 and it decreased to 0.0029 per cent in

2015. The highest share is 0.0062 per cent in 2010.

Position of Pakistan in terms of FDI

The share of Pakistan in South Asia was 60.8402 per cent in 1991 and it decreased to

6.3498 per cent in 2000. The highest share is 60.8402 per cent in 1991. The share of Pakistan in


is 1.1165 per cent in 1991. The share of Pakistan in developing countries was 0.6917 per cent in


The share of Pakistan in world FDI was 0.1766 per cent in 1991 and it decreased to 0.0227 per


The share of Pakistan in South Asia was 5.6765 per cent in 2001 and it decreased to

1.7128 per cent in 2015. The highest share is 16.1586 per cent in 2007. The share of Pakistan in


is 1.5598 per cent in 2007. The share of Pakistan in developing countries was 0.1768 per cent in


The share of Pakistan in world FDI was 0.0560 per cent in 2001 and it decreased to 0.0491 per


Position of Sri Lanka in terms of FDI

The share of Sri Lanka in South Asia was 14.9909 per cent in 1991 and it decreased to

3.5988 per cent in 2000. The highest share is 16.2558 per cent in 1992. The share of Sri Lanka in


is 0.3999 per cent in 1997. The share of Sri Lanka in developing countries was 0.1704 per cent in


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The share of Sri Lanka in world FDI was 0.0435 per cent in 1991 and it decreased to 0.0129 per


The share of Sri Lanka in South Asia was 1.2137 per cent in 2001 and it increased to

1.3494 per cent in 2015. The highest share is 2.9035 per cent in 2012. The share of Sri Lanka in


is 0.2346 per cent in 2012. The share of Sri Lanka in developing countries was 0.0378 per cent in


The share of Sri Lanka in world FDI was 0.0120 per cent in 2001 and it increased to 0.0387 per


Foreign Direct Investment as a percentage to GDP in the Countries of the SAARC

Region

The data on GDP are not available for the period from 1991 to 2000 for Afghanistan. The

foreign direct investment as a percentage to GDP in Afghanistan was 0.03 per cent in 2001 and it

increased to 0.30 percent in 2015. The highest value is 4.32 per cent in 2005. This means that

foreign direct investment is low in Afghanistan.

Foreign direct investment as a percentage to GDP in Bangladesh was 0.0045 per cent in

1991 and it increased to 1.08 percent in 2000. The highest value is 1.19 per cent in 1997. Foreign

direct investment as a percentage to GDP in Bangladesh was 0.66 per cent in 2001 and it

increased to 1.15 percent in 2015. The highest value is 1.22 per cent in 2005.

Foreign direct investment as a percentage to GDP in Bhutan was 0.24 per cent in 1991

and it decreased to 0.00 percent in 2000. The highest value is 0.44 per cent in 1996. The value of

foreign direct investment as a percentage to GDP in Bhutan was 0.00 per cent in 2001 and it

increased to 0.59 percent in 2015. The highest value is 8.04 per cent in 2006.

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Foreign direct investment as a percentage to GDP in India was 0.03 per cent in 1991 and

it increased to 0.78 percent in 2000. The highest value is 0.88 per cent in 1997. The ratio was

1.14 per cent in 2001 and it increased to 2.12 percent in 2015. The highest value is 3.97 per cent

in 2007.

Foreign direct investment as a percentage to GDP in Maldives was 2.66 per cent in 1991

and it increased to 3.57 percent in 2000. The highest value is 3.57 per cent in 2000. The ratio was

2.36 per cent in 2001 and it increased to 8.08 percent in 2015. The highest value is 15.26 per cent

in 2011.

Foreign direct investment as a percentage to GDP in Nepal was 0.06 per cent in 1991 and

it decreased to -0.01 percent in 2000. The highest value is 0.47 per cent in 1997. The ratio was

0.35 per cent in 2001 and it decreased to 0.24 percent in 2015. The highest value is 0.54 per cent

in 2010.

Foreign direct investment as a percentage to GDP in Pakistan was 0.60 per cent in 1991

and it decreased to 0.42 percent in 2000. The highest value is 1.52 per cent in 1994. The ratio

was 0.53 per cent in 2001 and it decreased to 0.32 percent in 2015. The highest value is 3.67 per

cent in 2007.

Foreign direct investment as a percentage to GDP in Sri Lanka was 0.74 per cent in 1991

and it increased to 1.07 per cent in 2000. The highest value is 2.87 per cent in 1997. The ratio

was 0.52 per cent in 2001 and it increased to 0.85 percent in 2015. The highest value is 1.87 per

cent in 2007.

To sum up, foreign direct investment expressed as a percentage to GDP is very low in

SAARC countries. Mostly it remains less than 2 per cent. Exceptionally in Maldives, it has

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touched 15 per cent in a particular year. However, in general, FDI as a percentage to GDP is very

low in SAARC Countries.

Distribution of FDI Inflows in the countries of the SAARC Region

The share of Afghanistan is varying from a minimum of -0.07 per cent to a maximum of

2.39 per cent in 2005. In several years the share is less than one per cent. The share of

Bangladesh in the SAARC region is varying between 0.33 per cent and 14.82 per cent. The

actual amount of FDI inflows varies from 1.39 millions of US Dollars to 2235.39 millions of US

Dollars.

Share of Bhutan varies from 0 per cent to 0.27 per cent. The share of Bhutan is very

meager and it remains less than one per cent. Share of India varies from 17.67 per cent to 91.27

per cent. The actual amount has grown from 75 millions of US Dollars to 47102 millions of US

Dollars. The share of Maldives varies from a minimum of 0.21 per cent to the maximum of 1.53

per cent. The actual amount of FDI inflows fluctuates between 6.50 millions of US Dollars and

360.80 millions of US Dollars.

FDI inflows in Nepal remain less than 100 millions of US Dollars. The share varies from

zero per cent to 0.57 per cent. The share of Pakistan varies from 1.78 per cent to 64.08 per cent.

The actual amount varies from a minimum of 271.92 millions of US Dollars and 4273 millions

of US Dollars. Share of Sri Lanka varies from 1.03 per cent to 16.96 per cent. The actual amount

of FDI inflows fluctuates from a minimum of 67.00 millions of US Dollars to 955.91 millions of

US Dollars.

The latest position for the period 2011-15 reveals that in the SAARC Region, India

shares 88.94 per cent. Pakistan shares 3.23 per cent Bangladesh shares 4.15 per cent. Sri Lanka

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shares 2.34 per cent. Maldives shares 0.86 per cent. Afghanistan shares 0.19 per cent. Nepal

shares 0.18 per cent. The least share of 0.07 per cent is by Bhutan.

The total amount of FDI inflows has grown from 423.35 millions of US Dollars in 1991

and has reached the highest value of 54665.66 millions of US Dollars and with fluctuations has

come down to 48434.75 millions of US Dollars in 2015.

Factors Influencing the FDI Inflows in the Countries of the SAARC Region

In Afghanistan Infrastructure, corporate tax rate, Real effective exchange rate and

inflation are significant at 1 per cent level. GDP, GDP per capita, Balance of payments and

Gross fixed capital formation are significant at 5 per cent level. Labour force and Gross

enrollment ratio are significant at 10 per cent level. Infrastructure, corporate tax rate, Real

effective exchange rate, inflation, Balance of payments and Gross fixed capital formation are

influencing FDI in Afghanistan.

In Bangladesh, labour force is significant at one per cent level. GDP, GDP per capita,

Gross fixed capital formation, infrastructure are significant at five per cent level. Balance of

payments is insignificant in Bangladesh.

In Bhutan, among the seven variables, trade openness is significant at five per cent level

and Gross fixed capital formation is significant at ten per cent level. Remaining five variables

become insignificant in Bhutan.

In India, infrastructure and the balance of payments are the prominent variables in

determining the inflows of FDI. Labour force is another determining variable in attracting the

FDI in India. High degree of trade openness also encourages the FDI inflow in to India.

Maldives is one of the least developed countries and a small island in the SAARC region.

Data on many variables are not available for Maldives. However, all the variables become

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insignificant. When variables are removed one by one, there is no much difference in the

explanatory capacity of the variables. Therefore, it is difficult to identify the variables

determining FDI as for as Maldives is concerned.

In Nepal, GDP per capita, Gross fixed capital formation and infrastructure become

significant at one per cent level. Labour force and real effective exchange rate are significant at

five per cent level. Balance of payments becomes significant at ten per cent level in Nepal.

For Pakistan, GDP, labour force, GDP per capita and balance of payments are the

important determinants of FDI. To some extent, infrastructure also influences the FDI inflow.

In Sri Lanka, Gross fixed capital formation and corporate tax rate significant at five per

cent level. Balance of payments become significant ten per cent level. The remaining variables

are insignificant in Sri Lanka.

Therefore, the results indicate that some macroeconomic variables such as: GDP, GDP

per capita, Balance of payments, Gross fixed capital formation, Real effective exchange rate,

Labour force and Infrastructure have been influencing FDI in the countries of the SAARC

region.

Factors Influencing the FDI in the SAARC Region

Empirical Panel Unit Root Test Results:

The study analyses panel unit root test results of LLC, IPS, ADF and PP Fisher tests with

constant and linear trend. The Table 9.1 shows the unit root results of all the study variables:

LLC, IPS, and both Fisher tests evaluate the null hypothesis of a unit root.

Foreign direct investment has statistically significant at 1per cent level of critical value of

intercept and intercept with linear trend in the all the panel unit root test of LLC, IPS, ADF and

PP Fisher tests. The result indicates that it rejects the null hypothesis. Hence FDI variable is

stationary at level.

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Gross domestic product is statistically significant at 1per cent level of critical value of

intercept and intercept with linear trend in the all the panel unit root test of LLC, IPS, ADF and

PP Fisher tests. The result indicates that it rejects the null hypothesis. Hence GDP variable is


Gross fixed capital formation has statistically significant at 1 per cent level of critical

value of intercept and intercept with linear trend in the all the panel unit root test of LLC, IPS,

ADF and PP Fisher tests. The result indicates that reject the null hypothesis. Hence Gross fixed

capital formation variable is stationary at level.

Inflation is statistically significant at 1 per cent level of critical value of intercept in the

panel unit root test of IPS, ADF and PP Fisher tests and 5 per cent level of critical value of

intercept and intercept with linear trend in LLC, ADF and PP Fisher tests in the study. Inflation

is insignificant in IPS test in intercept with linear trend. The result indicates that it rejects the null

hypothesis. Hence inflation variable is stationary at level.

Infrastructure is statistically significant at 1 per cent level of critical value of intercept in

the panel unit root test of LLC and PP Fisher tests and intercept with linear trend in LLC, IPS

and ADF tests in the study. The 5 per cent level of critical value of intercept with linear trend in

PP Fisher tests. Infrastructure is insignificant in IPS and ADF tests in intercept in the study. The

result indicates that it rejects the null hypothesis. Hence infrastructure variable is stationary at

level.

Labour force is statistically significant at 1 per cent level of critical value of intercept

with linear trend in the panel unit root test of LLC tests and 5 per cent level of critical value of

intercept in LLC test and intercept with linear trend in IPS and ADF Fisher tests in the study.

Labour force is insignificant in IPS, ADF and PP tests in intercept and PP test in intercept with

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linear trend in the study. The result indicates that it rejects the null hypothesis. Hence labour

force variable is stationary at level.

Real effective exchange rate is statistically significant at 1 per cent level of critical value

of intercept in the panel unit root test of LLC tests and insignificant in IPS, ADF and PP test. The

statistically insignificant in LLC, IPS, ADF and PP Fisher tests in intercept with linear trend in

the study. The result indicates that it rejects the null hypothesis. Hence real effective exchange

rate variable is stationary at level.

Trade openness is statistically significant at 1 per cent level of critical value of intercept

with linear trend in the panel unit root test of PP Fisher tests in the study. Trade openness is

insignificant in LLC, IPS and ADF Fishers test in intercept and intercept with linear trend in the

study. The result indicates that it rejects the null hypothesis. Hence trade openness variable is


This result concludes that all the variables included in the study are stationary which

indicates that all the variables are stationary at level and so I[0]. Therefore the regular panel data

model using the study variables is genuine.

Empirical Panel Regression Results:

The panel results indicate that the Infrastructure, Labour force and Trade openness are

influencing the FDI in the countries of the SAARC region. GDP, Gross fixed capital formation,

Inflation and Exchange rate variables are insignificant.

Policy Suggestions:

Afghanistan should try to control the depreciation of the external value of its currency,

and control the inflation to promote FDI. Its infrastructure should be developed. It should

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increase its GDP, GDP per capita and Gross fixed capital formation. It should reduce the deficit

in balance of payments.

Bangladesh should improve the quality of the labour force as it will be helpful to promote

the FDI. It should also aim at higher rate of economic growth, increase the GDP per capita,

Gross fixed capital formation. Bangladesh should also improve its infrastructure.

To attract more FDI, Bhutan should increase its trade openness by improving its exports

and imports.

India should increase its trade openness, and improve its infrastructure. It should reduce

its deficit in balance of payments. It should improve the quality its labour force and try to

maintain stability in exchange rate.

Nepal should increase its GDP per capita and Gross fixed capital formation and should

improve its infrastructure. It should also control the depreciation in the external value of its

currency.

Pakistan should improve the quality its labour force. It should increase its growth rate and

reduce the deficit in balance of payments.

Sri Lanka should increase the Gross fixed capital formation and reduce its corporate tax

rate to attract more FDI.

SAARC Countries as a region should improve the quality of its labour force. The

infrastructure for the region as a whole should be improved. Its trade openness should also be

creased by increasing its exports and imports. These efforts should be taken by the SAARC

countries through its joint cooperation with a high degree of political will.

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Conclusion:

SAARC Countries have implemented various policies at different points of time to attract

more FDI through liberalization process. However, they have not received the FDI at expected

level. The position in 2015 reveals that SAARC Countries have received 9.25 per cent of FDI at

Asian Countries level, 5.94 per cent of FDI at Developing Countries level and only 2.75 per cent

of FDI at Global level. However, India alone has received 2.51 per cent of FDI at Global level.

Hence when India is excluded, the FDI received by other SAARC Countries is extremely low.

This implies that the various policies implemented so far by the SAARC Countries are not

adequate to attract more FDI. Therefore by concentrating on the various policies suggested above

SAARC Countries should take further steps by identifying the constrains through further

research works by including socio, political and risk factors.

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FACTORS INFLUENCING THE FOREIGN DIRECT INVESTMENT IN …