Sector-wise productivity and spillover effects of foreign direct investment in the selected saarc countries

Abstract

Foreign direct investment is regarded as a crucial factor for economic growth in host countries. It enhances growth through transferring technology, knowledge, stimulating pro-competitive effects among firms and increasing labour and capital. This study examines the productivity effects of FDI across the eight economic sectors of the selected SAARC countries, including Bangladesh, India, Nepal and Pakistan over the period of 1990-2013. Through the use of the Fully Modified Ordinary Least Square technique, this study concludes that the positive effects of foreign direct investment differ across the commodity producing and services sectors. The econometric evidence reveals that estimates of all sectors are robust and in accordance with the economic theory. The productivity effect of FDI has positive and significant impact on the selected sectors. However, FDI in the energy sector shows insignificant but positive effect on the sector’s productivity. Maximum productivity of FDI is found in the services sectors, such as trade, transportation and communication and construction sectors. On the other hand, lower impact of FDI is found in the commodity producing sectors such as agriculture, mining and manufacturing sectors. With respect to country-level institutional variables, law and order situation of country is proved as important factor for sectoral productivity. The productivity of FDI also depends on business friendly regulations and law and order situation of the country. Regarding the productivity spillover effects, FDI contribution in construction, transportation and communication sectors acts as a key catalyst for other sectors in the host countries. Thus, introduction of investment friendly policies, regulation, improved law and order situation of the country and growth in secondary level education can enhance the sectoral productivity