Do the FDI inflows affect domestic investment? Issues before India and South Asia

South Asian countries are characterised with varied pattern of FDI inflows, Gross Domestic Product (GDP) and Domestic Investment. It is interesting to have an analysis of these factors for evaluating the impact of FDI on domestic investment and GDP. FDI has an important role in promoting growth by accelerating domestic investment in the host country. Many a times it is observed that FDI in host countries deviate much from the expected role of promotion of domestic investment by displacing domestic investment. South Asia, with an annual average of 6.7 percent increase in real GDP over the past decade, holds the world’s third largest position in terms of GDP. However, South Asia’s FDI inflows as a share of GDP is observed to be the lowest among all developing regions. A detailed analysis is performed with the help of methodology used by Agosin and Mayor (2000) to measure the impact of FDI in this paper. The beneficial/harmful effect of FDI are termed as crowding in/out effects. For this purpose, panel data analysis is performed for the years ranging from 2003 to 2013. The World Bank data of 2005 base year is put to use. Three variables such as FDI inflows to GDP ratio, Growth of Gross Domestic Product (GDP) and Domestic Investment (DINV) are considered for Seemingly Unrelated time series analysis for India and for the Seemingly Unrelated panel data analysis for South Asian countries. The results obtained highlight important findings with regard to FDI in bringing about crowding in and crowding out impacts of FDI. It also brought to light the compatibility between domestic investment and Foreign Direct Investment in India and South Asia. The SUR results for the entire South Asian region indicate Crowding Out effect of FDI Inflows as it can be observed from the ßLT value which is -7.023. This implies that additional one dollar of FDI displaces roughly seven dollars of domestic investment from the South Asian countries. The SUR time series analysis performed individually for India indicates that India too shows mild crowding out impact of FDI in its economy. In the past decade, though South Asia witnessed an increase in FDI inflows, it resulted in the displacement of domestic investment, which is a great cause of worry. FDI policies have to be instrumental in preventing the entry of harmful type of FDI inflows and in promoting the entry of the right type of FDI into South Asia.