Causes and effects of foreign direct investment in South Asia

Abstract

The objective of the chapter is to better understand the economic and institutional factors that mould the evolution of FDI in South Asia. It is shown that FDI in South Asia is very low compared to what is seen in other parts of the world and that the effects on economic growth are limited and decreasing in the last 25 years. It is possible that this poor growth is related to the poor performance of India—which is the main economic heavyweight in the region—and/or to the conflicts that continuously occur in Afghanistan, Pakistan, Bangladesh, Sri Lanka and Nepal, impeding the development of institutional frameworks and attracting FDI either to military activities, as seems to be the case in Afghanistan, or FDI to recover from military conflicts, as appears to happen in Bangladesh, Pakistan and Nepal. Most importantly, institutions and institutional change play a major role not only in the amount of FDI but also on its nature; and it is the quality of FDI that influences economic growth, not its quantity that can be associated only with destruction and reconstruction associated with conflicts.