Foreign Direct Investment in South Asia: Policy, Trends, Impact and Determinants

Abstract

One of the remarkable features of globalization in the 1990s was the flow of private capital in the form of foreign direct investment. FDI is an important source of development financing, and contributes to productivity gains by providing new investment, better technology, management expertise and export markets. Given resource constraints and lack of investment in developing countries, there has been increasing reliance on the market forces and private sector as the engine of economic growth. In the neoclassical growth model, FDI promotes economic growth by increasing the volume of investment and its efficiency. Therefore, all countries, particularly developing and least developed countries, seek to attract Foreign Direct Investment1 (FDI) for the package of benefits it brings along with it into the host country economy. Foreign investment, especially FDI, not only supplements domestic investment resources but also acts as a source of foreign exchange and can relax balance of payment constraints on growth. Considering the economic benefits and importance of FDI for promoting economic growth, most of the countries have formulated wide-reaching changes in national policies to attract FDI.