Foreign Direct Investment and Economic Growth: A Study on South Asian LDCs

Abstract

Least developed economies strive for foreign capital as they suffer from capital constraints to accelerate growth and economic transformation, while macroeconomists debate on the impact of FDI in economic performance. South Asian LDCs continue to treat FDI inflow as a key development factor, and continue to adopt FDI-friendly policies, though only a few studies were conducted for testing the impact of FDI in the context of this region. This study extends the previous empirical studies on south Asian LDCs by developing a new framework specifying direct and spill-over effects of FDI, and providing evidence from panel data analysis for the period 1980-2014. The results show positive effect of FDI for both direct and externalities effect. It is also evidenced from this study that the impact of FDI is much stronger after 1990.