Role of governance in attracting foreign direct investment inflow: empirical evidence from South Asia region

Abstract

The inflow of FDI brings many economic benefits including more employment opportunities, sharing of modern knowledge, and the transfer of needed capital to aid the depressing domestic investment. In view of this, the current study aims to find out the empirical impact of the governance quality of the host country on FDI inflow. The empirical analysis was arranged by sampling the 20-year (2000-2019) financial statistics of 8 South Asian economies. For regression assessment, we employ FMOLS and DOLS models and estimate the coefficients in the long run. The empirical analysis discloses the positive significant role of the aggregate governance index on FDI inflow, implying that better governance can uplift the inflow of FDI. In addition, the empirical results disclose the negative impact of the inflation rate, while the significant positive impact of trade volume, population growth, labor force, and financial development on FDI inflow. The empirical analysis yields vital policies both for domestic policy officials and foreign investors. Primarily, it is recommended to focus on improving the governance situation to attract more FDI. This study enriches the literature by showing the interplay between governance and FDI inflow and has equal policy implications for other developing economies of the world.

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