India's policy towards foreign direct investment (FDI) has changed several times since 1950s, showing confusion about its true economic impact on national economy. Thus, this paper analyses the impact of FDI inflows on investment by national investors and on GDP growth, using time series cross-section analysis of panel data from five South Asian countries: India, Pakistan, Bangladesh, Sri Lanka and Nepal.
We find that increases in the FDI inflows in South Asia were associated with a many-fold increase in the investment by national investors, suggesting strong complementarity and linkage effects between foreign and domestic investment.
Further, the impact of FDI inflows on GDP growth rate is found to be insignificant prior to 1990, but strongly positive over the 1990-96 period, supporting the view that FDI is more beneficial in more open economies. We also found that since 1980, FDI inflows contributed more to GDP growth in South Asia than an equal amount of foreign borrowing.
These results suggest that we should try to increase inflows of FDI into South Asia, without giving unreasonable concessions under the Multilateral Investment Agreement in WTO negotiations as these could make FDI inflows less desirable as was the case in 1970s and 1980s.