The behaviour of FDI in Saouth Asian Countries

Muhammad Tariq Majeed & Shabib Haider Syed

Abstract

This paper analyzes the behavior of FDI in South Asian countries using panel data for the period 1970-2004. Following panel data model we applied fixed effects model to clearly identify the factors affecting FDI. The analysis shows that GDP, trade openness, real exchange rate, labor force and health expenditures effect FDI positively and significant. The study finds that the effect of military expenditures and external debt on FDI is negative and significant. These variables reflect the non-productive use of resources and create a negative signal for foreign investors. The study further finds that the relationship between FDI and domestic investment is complementary but insignificant. This weak relationship explains the fact that domestic investment performance is poor in these countries. The effect of taxes is negative and insignificant. The negative relationship implies that lack of fisca incentives is a hurdle for FDI. However if overall investment climate is sound then MNCs overlook it.