FDI, Foreign Debt, and Economic Growth: The South Asian Perspective (1980-2020)

Rizwan Akhtar  JAMSHEED

doi:10.52459/jowett37270124

Authors

Rizwan Akhtar JAMSHEED Institute of Finance and Economics, Central University of Finance and Economics, Beijing, China https://orcid.org/0009-0005-2007-4925

DOI:

https://doi.org/10.52459/jowett37270124

Keywords:

Panel data analysis, FDI, Foreign debt, Economic Growth, South Asia

Abstract

The present study examines the intricate relationship between foreign direct investment (FDI), foreign debt, and economic growth over the period of 1980 to 2020 in the following countries: India, Pakistan, Sri Lanka, Bangladesh, Nepal, Maldives, and Bhutan. The analysis utilizes data obtained from the World Bank, with productive projects, improved technology and expertise, technological transfer, foreign direct investment (FDI), export, import, and productive projects serving as independent variables. GDP growth is considered as the dependent variable. The model is subjected to rigorous testing procedures, which include the Fisher-Type ADF (for panel unit root), co-integration tests, histogram-based normality assessment, White test for heteroscedasticity, VIF (variance inflation factor) test for multicollinearity, and F-test for parameter significance. These procedures are implemented to ensure the model's robustness. Subsequent analysis is guided by the Hausman test's preference for the Fixed Effects (FE) model over the Random Effects (RE) model. It is worth noting that in both the FE and RE models, a negative correlation is observed between foreign debt and economic growth. The foreign direct investment (FDI) growth rate is inversely proportional to the growth rate of economic output (0.025 percent) and foreign debt (0.117 percent), according to the FE model. The interdependence of foreign direct investment (FDI) and foreign debt underscores the criticality for developing countries to effectively manage their foreign debt while facilitating FDI inflow. The research emphasizes that policy frameworks in these nations must reduce foreign debt in order to create an environment that is favorable for greater foreign direct investment.

CITE THIS PAPER:

Jamsheed, R. A. (2024). “FDI, Foreign Debt, and Economic Growth: The South Asian Perspective (1980-2020)” Journal of World Economy: Transformations & Transitions (JOWETT) 3(07):27. DOI: https://doi.org/10.52459/jowett37270124

Metrics

Metrics Loading ...

References

Ahmed, A. & Gasparatos, A. (2020). Multi-dimensional energy poverty patterns around industrial crop projects in Ghana: Enhancing the energy poverty alleviation potential of rural development strategies. Energy Policy, 137(October), 111123. https://doi.org/10.1016/j.enpol.2019.111123

Alemzero, D. A., Sun, H., Mohsin, M., Iqbal, N., Nadeem, M. & Vo, X. V. (2021). Assessing energy security in Africa based on multi-dimensional approach of principal composite analysis. Environmental Science and Pollution Research, 28(2), 2158–2171. https://doi.org/10.1007/s11356-020-10554-0

Asafo-Agyei, G. & Kodongo, O. (2022). Foreign direct investment and economic growth in Sub-Saharan Africa : A nonlinear analysis. Economic Systems,Volume 46, Issue 4,2022. https://doi.org/10.1016/j.ecosys.2022.101003

Badar. A., Shakeel I., Malik, I. R. (2018). FDI, external debt ’s and their impact on economic growth of pakistan: empirical evidence using larger sample size. Journal of Contemporary Management Sciences, 4(1), 50-65. https://dx.doi.org/10.2139/ssrn.3121113

Chandio, A. A., Jiang, Y., Rehman, A., Twumasi, M. A., Pathan, A. G. & Mohsin, M. (2021). Determinants of demand for credit by smallholder farmers’: a farm level analysis based on survey in Sindh, Pakistan. Journal of Asian Business and Economic Studies, 28(3), 225–240. https://doi.org/10.1108/jabes-01-2020-0004

Hsiao, C. (1986) Analysis of Panel Data, Vol. 11 of Econometric Society Monographs. Cambridge University Press, New York.

Jayaraman, T. K. & Lau, E. (2009). Does external debt lead to economic growth in Pacific island countries. Journal of Policy Modeling, 31(2), 272–288. https://doi.org/10.1016/j.jpolmod.2008.05.001

Jones, C. I. (2019). Paul Romer: Ideas, Nonrivalry, and Endogenous Growth. Scandinavian Journal of Economics, 121(3), 859–883. https://doi.org/10.1111/sjoe.12370

Kharusi, S. Al & Mbah, A. S. (2018). External Debt and Economic Growth : The Case of Emerging Economy. Journal of Economic Integration, 33(1), 1141–1157. http://www.jstor.org/stable/26418778

Mohsin, M., Ullah, H., Iqbal, N., Iqbal, W. & Taghizadeh-Hesary, F. (2021). How external debt led to economic growth in South Asia: A policy perspective analysis from quantile regression. Economic Analysis and Policy, 72, 423–437. https://doi.org/10.1016/j.eap.2021.09.012

Nguyen, H. H. (2020). Impact of foreign direct investment and international trade on economic growth: Empirical Study in Vietnam. Journal of Asian Finance, Economics and Business, 7(3), 323–331. https://doi.org/10.13106/jafeb.2020.vol7.no3.323

Robert J. Barro, (1995). "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc. https://www.nber.org/papers/w5326

Sakib, M. N.; Saikat P.; Kumar, R. (2021). Chinese Foreign Direct Investment and Economic Growth of Bangladesh: A Vecm Analysis. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3914517

Saswata Chaudhury NN (2020) Impact of FDI on Economic Growth in South Asia: Does Nature of FDI Matters? India: Development Foundation SAGE. https://doi.org/10.1177/0974929220969679

Shahbaz, M., Zakaria, M., Shahzad, S. J. H. & Mahalik, M. K. (2018). The energy consumption and economic growth nexus in top ten energy-consuming countries: Fresh evidence from using the quantile-on-quantile approach. Energy Economics, 71, 282–301. https://doi.org/10.1016/j.eneco.2018.02.023

Tahir, M., Jan, A. A., Shah, S. Q. A., Alam, M. B., Afridi, M. A., Tariq, Y. Bin & Bashir, M. F. (2020). Foreign inflows and economic growth in Pakistan: some new insights. Journal of Chinese Economic and Foreign Trade Studies, 13(3), 97–113. https://doi.org/10.1108/JCEFTS-01-2020-0005

Wang, R., Xue, Y. & Zheng, W. (2021). Does high external debt predict lower economic growth? Role of sovereign spreads and institutional quality. Economic Modelling, 103(June), 105591. https://doi.org/10.1016/j.econmod.2021.105591

World Investment Report (2019). UNCTAD. https://unctad.org/publication/world-investment-report-2019

World bank (2020). World Development Indicators, dataset. https://databank.worldbank.org/source/world-development-indicators