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Does the Inflow of FDI Stock Matter? Evidence from SAARC Countries

Hem C. Basnet and Gyan Pradhan

Economic Papers, 2014, vol. 33, issue 3, 305-312

Abstract: type="main" xml:id="ecpa12078-abs-0001"> This paper examines the influence of foreign direct investment (FDI) on economic growth in five SAARC member countries – Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Using time series data from 1990 to 2010, an empirical model is estimated in which growth of real GDP depends on FDI, investment, openness, tax policy and inflation. After establishing the stationarity of the data series, cointegration tests are performed, and an error correction model is developed and estimated. The empirical results indicate that, unlike investment and openness to international trade, FDI has not played a significant role in promoting economic growth in these countries. We conclude that the effectiveness of FDI may depend in part on the size of the inflows, as well as the level of economic development.

Date: 2014
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