FOREIGN CAPITAL INFLOWS AND DOMESTIC INVESTMENT IN SOUTH ASIAN COUNTRIES: AN ECONOMETRIC ANALYSIS

Abstract

The current study aims to investigate the impact of foreign capital inflows in the form of external debt, foreign direct investment, and workers' remittances on domestic investment in South Asian Countries i.e. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. For the sake of analysis 30 years panel data of these economies from 1990 to 2019 has been taken. To examine the long-run relationship among the variables the Hausman test and Fixed-Effect Model like econometric techniques have been used. Granger Causality test has been made to check the causality between external debt and domestic investment, external debt and foreign direct investment, and workers’ remittances and external debt. The results of the fixed effect model indicate that external debt stimulates domestic investment. External debt by removing the deficiency of capital increases the efficiency of government development projects and encourages domestic investment in the economy. Foreign direct investment also has a favorable impact on domestic investment. Workers’ remittances by increasing the contents of foreign capital in the economy encourage domestic investment.  The Granger Causality results indicate that there exist a short-run and long-run causality from external debt, foreign direct investment, and workers' remittances to domestic investment. The study recommends that efforts will be made to increase the inflow of foreign capital to boost domestic investment in the economy which is the major determinants of economic growth.