Causal Nexus Between FDI Inflows and Its Determinants in SAARC Countries

Abstract

This article aims to understand the drivers of foreign direct investment (FDI) inflows and its nexus with its determinants such as economic growth, inflation rate, labour productivity, infrastructure development, market size, openness of the economy, political stability and corporate tax for South Asian Association for Regional Corporation (SAARC) countries. The article is based on secondary data from the World Bank and International Labour Organization (ILO) for 19 years from 2001 to 2018 for 6 SAARC countries, viz. Bangladesh, Bhutan, India, Nepal, Pakistan and Sri Lanka. The findings indicate that there exists long-run, short-run and joint causal relationship among infrastructure development, market size, openness of the economy, political stability and corporate tax and FDI inflows. Among these variables, the corporate tax is the most important one because it shows bidirectional causality with FDI inflows in the long run as well as short run along with joint strong causality. However, only the coefficients of infrastructure development and corporate tax were found to be positively and negatively significant, respectively. Therefore, better infrastructure development and decrease in corporate tax may enhance FDI inflows in SAARC countries. This infers that with the decrease in corporate tax, more FDI inflows may take place, and higher FDI inflows may decrease in corporate tax further. Therefore, this article suggests that SAARC countries should accelerate the process of integration of their economy with the rest of the world along with political stability, enhance the infrastructure facility and reduce the corporate tax to get the higher FDI inflows.

JEL: F21, F02, C22