Determinants of Foreign Direct Investment in SAARC Nations: An Econometric Investigation

The present study employs fixed effects and random effects models to explore the determinants of Foreign Direct Investment (FDI) in selected South Asian Association for Regional Cooperation (SAARC) countries for the period 1970-2007. In order to choose an appropriate model among the fixed effects and random effects estimator, the Hausman specification test was conducted and its result supported the random effects model regarding the determinants of FDI. The empirical results reveal that the market size, GDP per capita, trade openness, infrastructure facilities, inflation, degree of risk and uncertainty, and SAARC country formation are the most significant factors in determining FDI in the SAARC countries. Besides, the results show that other variables such as human capital, degree of industrialization, real exchange rate, domestic investment and terms of trade are insignificant, implying that these factors do not play any significant role in attracting FDI in SAARC countries. The findings indicate that the governments of the SAARC countries should adopt incremental efforts to enhance economic growth, enlarge GDP per capita, implement more successful open-door policies, facilitate better infrastructural facilities and provide effective policy framework on macroeconomic stability to successfully attract appropriate FDI in the region.