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The Nexus between FDI and Growth in the SAARC Member Countries

Journal of East Asian Economic Integration (JEAI), Vol. 19, No. 1 (March 2015) 39-70

32 Pages Posted: 1 Apr 2015 Last revised: 6 Nov 2016

Sangjoon Jun

Kangnam University - Department of International Trade

Date Written: 2015

Abstract

This paper examines the effects of foreign direct investment (FDI) on South Asian economies’ output growth, utilizing recent panel cointegration testing and estimation techniques. Annual panel data on eight SAARC (South Asian Association for Regional Cooperation) member countries’ macroeconomic variables over the period 1960- 2013 are employed in empirical analysis. Using various heterogeneous panel cointegration and panel causality tests, a bi-directional relationship between FDI and growth is found. We find evidence for both FDI-led growth and growth-induced FDI hypotheses for the South Asian economies over the sample period. Individual member countries exhibit heterogeneity in terms of the direction or existence of causality subject to their idiosyncratic economic conditions. Among various regressors, FDI, financial development, human capital, and government consumption show the most significant positive effects on output growth. As determinants of FDI, GDP, financial development, human capital, and government consumption are found significant in the region. The bi-directional causality between FDI and growth is found robust to the inclusion of other control variables and using different estimation techniques.

Keywords: FDI, Growth, Heterogenity, Panel Cointegration and Causality, SAARC

JEL Classification: F2, F4, O2, O4, O5

Suggested Citation

Jun, Sangjoon, The Nexus between FDI and Growth in the SAARC Member Countries (2015). Journal of East Asian Economic Integration (JEAI), Vol. 19, No. 1 (March 2015) 39-70. Available at SSRN: https://ssrn.com/abstract=2587524

Sangjoon Jun (Contact Author)

Kangnam University - Department of International Trade ( email )

Korea

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