Panel Cointegration and Granger Causality Approach to Foreign Direct Investment and Economic Growth in South Asian Countries

Abstract

The aim of this study is to examine the long run equilibrium relationship between FDI, growth rate and economic growth in the developing countries of South Asia. Data was collected from the United Nations Conference on Trade and Development and World Bank Development Indicator from 1990 to 2017. However, Johansen Fisher Panel Cointegration and Pairwise Dumitrescu Hurlin Panel Causality Tests were utilized to address the objective of this paper. Consequently, it was discovered that a long run equilibrium relationship exists between FDI, growth rate of economy and economic growth in the developing countries of South Asia within the period under consideration. Moreover, there is an existence of unidirectional causality running from both growth rate and economic growth to FDI inflows in these countries. This implies that whenever the target of the policy makers in these economies is to facilitate the sporadic inflows of foreign capital, expanding the market size and manipulating the rate of economic growth would induce an increase in FDI inflows in the long run.

Finally, the important findings that emerged in this work made this paper to recommend the following vital policy for the policy makers, investors, financial institutions regulators and future researchers. Therefore, the policy makers in the developing countries of South Asia should come up with the strategic policy measure that will expand the market size and ensure a sustainable growth rate in this sub region