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The Nexus between FDI and Growth in the SAARC Member Countries

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  • Jun, Sangjoon

    (Kangnam University)

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.

Suggested Citation

  • Jun, Sangjoon, 2015. "The Nexus between FDI and Growth in the SAARC Member Countries," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 19(1), pages 39-70, March.
  • Handle: RePEc:ris:eaerev:0030
    DOI: 10.11644/KIEP.JEAI.2015.19.1.290
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    More about this item

    Keywords

    FDI; Growth; Heterogenity; Panel Cointegration and Causality; SAARC;
    All these keywords.

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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