The Behavior of FDI in South Asian Countries

This paper analyzes the behavior of FDI in South Asian countries using panel data for the period 1970-2004. We applied fixed effects model to identify the factors that determine FDI inflows. The analysis shows that GDP, trade openness, real exchange rate, labor force and health expenditures affect FDI positively and significantly. While the impact of military expenditures and external debt on FDI is negative and significant. These variables reflect the non-productive use of resources and create a negative signal for foreign investors. The study further finds that the relationship between FDI and domestic investment is complimentary but insignificant. This weak relationship explains the fact that domestic investment performance is poor in these countries