The Impact Of Foreign Direct Investment On Economic Growth

Foreign direct investments(FDI)continue to be one of the most critical factors that drive economic growth and enhance competitiveness in both developing and emerging economies.This research paper delves into the profound impact of FDI on the economic growth of SAARC nations.Over the past two decades,the significance of foreign direct investments(FDI)has witnessed an unprecedented surge,becoming a defining characteristic of the economic landscape in emerging markets.FDI plays a pivotal role in assisting developing countries to secure much-needed financial resources for their progress.Moreover,it acts as a catalyst for enhancing the manufacturing and commerce sectors by introducing cutting-edge technology,amplifying local production and exports,generating employment opportunities,nurturing local skill development,and bolstering infrastructure.These endeavors ultimately pave the way for sustained long-term economic advancement.The majority of past research has been cross sectional studies or country specific using time series method for many countries.A contribution to the literature is a study focused on the SAARC economies with subsidies on factors,production processes and same economic policies.Furthermore,there is essentially no long-term specialized study for SAARC that would completely explain the economic causes and contributors of FDI flows to these countries prior to 2017.According to contemporary research,foreign investors prefer to invest in economies with significant human capital,good infrastructure,and a stable economy so that they can reap huge rewards.These factors prompted me to seek for the most effective economic variables that have a significant impact on the economic fundamentals of SAARC member countries.In earlier studies,infrastructure/public spending investment has been employed as an alternate indicator of infrastructure.This may not be best,given the lack of governance and poor results of infrastructure investment in underdeveloped or developing countries.Furthermore,the center point of current study is not only the infrastructure facilities but as well as influence of control of corruption,human capital,Political stability and Government effectiveness which have not been studied earlier for SAARC countries.Finally,the current study has applied Panel data technique because they are superior to cross sections and time series in using all availableinformation,which cannot be determined in clear time series or cross section.This thesis encompasses four major objectives.The primary objective is to ascertain the influence of regional economic integration on FDI in SAARC countries.The second objective involves empirically identifying the determinants of FDI in the SAARC nations.The third objective seeks to explore the impact of political factors on FDI and its subsequent effects on economic growth.Lastly,the fourth objective aims to determine the economic factors that effectively contribute to the resurgence of FDI and facilitate economic growth in SAARC countries.To achieve the first objective,qualitative data have been utilized along with quantitative data in the forms of tables and graphs.The research has revealed that regional economic integration can positively impact FDI inflows in SAARC countries by creating a larger and more integrated market,promoting trade facilitation,and enhancing investment opportunities.The formation of regional agreements,such as preferential trade agreements and regional trading blocs,can provide a conducive environment for attracting FDI by reducing trade barriers,harmonizing regulations,and promoting investor confidence.While regional economic integration holds great promise for attracting FDI and fostering economic development in the SAARC countries,its success depends on addressing the challenges and maximizing the opportunities presented by integration initiatives.Policymakers should focus on strengthening regional cooperation,promoting investment-friendly policies,improving infrastructure,and addressing socio-political barriers to create an enabling environment for FDI inflows.Additionally,continuous research and knowledge sharing within the SAARC region are essential to stay updated on best practices,emerging trends,and policy measures that can further enhance the influence of regional economic integration on FDI.By harnessing the potential of regional integration,the SAARC countries can unlock new avenues for economic growth,job creation,and sustainable development,positioning the region as a vibrant hub for investment and prosperity.To achieve the second objective,the study handles a Panel Data analysis on a sample of six SAARC countries from 1998 to 2017,including Pakistan,India,Bangladesh,Nepal,Sri Lanka and Bhutan.The dependent variable is FDI,and independent variables that are taken into account are Gross Domestic Product(GDP),Government Effectiveness,Level of Governance,Political Stability,Regulatory Quality,Financial Development,Inflation,Infrastructure and Human Capital.According to our findings,Gross Domestic Product(GDP),Level of Governance,Political Stability,Regulatory Quality,Financial Development,Inflation and Infrastructure are the powerful determinants of FDI inflows.However,the coefficients and p value for Government Effectiveness and Human capital are not substantial.This research is valuable since it delves deep into the determinants that lead to increased Foreign Direct Investment(FDI)inflows to the world’s most important emerging economies.By understanding the factors that attract FDI,policymakers and stakeholders can strategically develop measures to enhance the economic development of the region.The findings of this study have the potential to guide governments,businesses,and organizations in formulating effective policies and practices that attract substantial FDI inflows,ultimately driving economic growth and prosperity.Furthermore,the significance of this research lies in its timeliness.Despite being crucial players in the global economy,these emerging economies have lacked comprehensive research in this area for a considerable period.The absence of up-to-date and context-specific knowledge on the determinants of FDI inflows has limited their ability to optimize economic opportunities and fully leverage their potential for growth.Therefore,the development of policy guidelines based on this research fills a crucial gap,providing valuable insights and strategies to unlock the region’s untapped potential and accelerate its economic progress.The policy guidelines that are being developed as a result of this research are expected to address a wide range of factors that influence FDI inflows.These factors may include economic indicators,such as market size,infrastructure development,and trade policies,as well as social and political factors like stability,governance,and human capital.By taking a comprehensive approach and considering these multifaceted determinants,the policy guidelines aim to provide a holistic framework for attracting FDI and fostering sustainable economic development.Ultimately,the outcomes of this research and the subsequent policy guidelines have the potential to reshape the economic landscape of these emerging economies.By attracting increased FDI inflows,these regions can create new avenues for job creation,technology transfer,and knowledge exchange,leading to enhanced industrialization,improved living standards,and reduced poverty.The long-awaited research and resulting policy guidelines pave the way for a brighter future,empowering these emerging economies to thrive and achieve their full economic potential on the global stage.To address the third and fourth objective,the research adopts Panel Data analysis on a sample of six SAARC countries from 1998 to 2017,including Pakistan,India,Bangladesh,Nepal,Sri Lanka,and Bhutan.Our findings imply that foreign direct investment inflows have a strong positive impact on recipient countries’ economic growth.The research also discovered that Foreign Direct Investment(FDI),Government Effectiveness,Political Stability,Regulatory Quality,Inflation,and Human Capital all have a significant impact on economic growth,while Financial Development is not significant.This signifies that the political and macroeconomic environments are essential absorptive capacities that must be developed in order for countries to reap the full benefits of foreign direct investment’s growth effect.The political environment plays a pivotal role in creating a stable and conducive atmosphere for foreign investors.Countries with strong political institutions,good governance,and transparent policies tend to attract higher levels of FDI.A stable political environment assures investors of a predictable business climate,protection of property rights,and the rule of law,all of which are crucial for attracting long-term and sustainable investments.Moreover,a sound macroeconomic environment is equally crucial for maximizing the growth impact of FDI.Macroeconomic stability,characterized by low inflation rates,fiscal discipline,and a stable exchange rate,provides a favorable environment for businesses to thrive.These factors instill confidence in investors,reduce uncertainties,and facilitate long-term planning.Additionally,a well-functioning financial sector,efficient capital markets,and access to credit are essential for mobilizing and channeling FDI into productive sectors,fueling economic growth,and generating employment opportunities.Overall,foreign direct investments(FDI)play a crucial role in driving economic growth and enhancing competitiveness in developing and emerging economies.The research conducted in this paper focuses on the profound impact of FDI on the economic growth of SAARC nations,highlighting the surge in FDI over the past two decades as a defining characteristic of emerging markets.FDI acts as a catalyst for various positive outcomes such as technological advancements,increased local production and exports,job creation,skill development,and improved infrastructure.These factors contribute to sustained long-term economic advancement.The study addresses the gap in specialized research on FDI in SAARC countries,particularly regarding economic causes and contributors prior to 2017.It examines the influence of regional economic integration,determinants of FDI,political factors,and effectiveeconomic variables on the economic fundamentals of SAARC member countries.Panel data analysis is employed to utilize all available information and provide comprehensive insights.The findings reveal the significant impact of factors such as GDP,governance,political stability,regulatory quality,financial development,inflation,and infrastructure on FDI inflows.Moreover,the study highlights the positive relationship between FDI inflows and economic growth,emphasizing the importance of political and macroeconomic environments in maximizing the benefits of FDI.The research contributes valuable insights for policymakers to formulate guidelines aimed at increasing FDI inflows and fostering economic development in the SAARC region.This dissertation is organized into six chapters;chapter 1 provides a background of the study,SAARC: an economic region,process of economic integration in SAARC,political factors and acute mistrust among SAARC nations,statement of the problem,research questions,objectives of the study,motivation of study and research contributions.The second chapter contain the literature review which includes,concept of foreign direct investment,the impact of FDI,types of FDI Inflows,FDI trends in the world,FDI trends by region,relevance of FDI: Review of past study during Pre and Post liberalization period up to year 1999,relevance of FDI: Review of past study during time interval 2000 to 2020,research that demonstrate a positive connection between foreign direct investment and economic growth,research that demonstrate a negative or confusing connection between foreign direct investment and economic growth.The third chapter describes the overview of foreign direct investment in each member of SAARC country.The fourth chapter explain the regional economic integration and determinants of FDI in SAARC countries which contain,regional integration,effects of regional integration,regional Cooperation in South Asia,potential for regional economic integration in South Asia,descriptive analysis of FDI and economic indicators in SAARC,regional integration and FDI,spatial distribution of FDI across the region,policy context and conclusion.Determinants of FDI in SAARC countries includes,introduction,brief literature,theoretical framework,hypothesis development,methodology,analysis and results and conclusion.The fifth chapter discusses and analysis the influence of foreign direct investment in SAARC countries,this chapter includes the introduction of the study,brief literature,theoretical review,hypothesis development,methodology,analysisand results and conclusion.The last six chapter explain the conclusion of overall study,limitation,contribution and future research.