Abstract: domestic investment. One of the number one

Abstract:

                There
are many different sides and risks involved when investing overseas. This
includes but are not limited to the rule of law, transparency, governance,
level of international trade, business and financial conditions, and so on. Within
the economy the domestic investment climate is made up of all these things
listed above, because of that it influences the foreign capital in the specific
country. This study consists of more than 20 years of study from 1995-2014; it
analyzes the role of domestic investment climate in addition to many other
macroeconomic variables in South Asia by using panel data techniques (Heritage
Foundation Economic Freedom Index). This study shows that overall economic
freedom has an important factor for foreign direct investment. However,
separate parts of economic freedom lists that only fiscal and trade freedom
make an impact on Foreign Direct Investment (FDI). The conclusion of this study
is that in order for South Asian Nations to increase foreign capital they need
to improve their domestic investment.

            One of the number one sources for
long term sustainable economic progression in developing countries is foreign
direct investment. It is crucial in the development of countries by helping
their overall economic success, with technological development, capital
accumulation, improving resource allocation, and strengthening financial
capital. Other factors such as institutions of the country also play a big
factor in attracting FDI. Better investment climate helps the firms have an even
greater amount of discretion in what strategies they choose. Certain characteristics
such as market-supporting and investment friendly institutional environment facilities
are the reason that there are less hurdles and hardships in certain business
operations that maintain and operate certain activities within the specific
countries. Strong institutions make it a great place for foreign direct
investment, there are a few reasons for this. First off, it would decrease
transactions costs. Second, a very strong developed institutional framework is
better for a more powerful discretion in their choices and their discretion in
what their strategy is. Lastly, it will decrease the information asymmetries
meaning there will be less risk within transactions.

            Economic freedom in a country implies
that there aren’t any restrictions, pressuring or certain things you have to do
in exchange or transfer for your personal assets which you have obtained
legally. Economic freedom is composed of the protection for not only your
individual property but also the freedom to compete and being able to exchange
by your own choice. In a free society people are allowed to work according to
their preference, produce, consume, and also invest any way that they see fit
for themselves. There is a very important factor in this and that is to
determine the importance of domestic environment in how it attracts foreign
capital which helps motivate us to study the relationship and other parts of
things that make a big impact in every aspect of the FDI in five South Asian
countries – Pakistan, Bangladesh, India, Nepal, and Sri Lanka, ranging from
over a 20-year period, 1995-2014.

            The flow of foreign investment in
South Asia has increased a large amount, with every once in a while, fluctuations.
Foreign investment in South Asian nations in 1985 was rather low; it came up
slightly due to policies liberalized by the nation in the 1990s. India kept a
higher FDI throughout the entire period, Pakistan is who follows. India kept
the high inflows of FDI until nearly 2014. India is just one of many countries
with an emerging improving economy in the world today, because of this it is
providing a great climate for investors and foreign firms. India is the person
who receives the most automotive inflow and between 2013-2014 India received
several projects that ranked over $100 million. The 2015 World Investment
Report states that India was ranked as ninth overall in 2014, they increased
22% in the FDI. Previously it was ranked 15th in the two previous
years. Nepal’s FDI stayed very small for over 30 years. In fact, they were
extremely little or even in the negative from 1985-1989, the average was just
$4.31 million. During the 1990s, there was finally an acceleration however,
they were still not very significant till 2000. Due to this, Nepal is one
country that does not attract foreign investment very well compared to other
countries that are developing in South Asia. FDI help make capital and labor
more efficient and greater. During a survey report in 2010-2012 it was noted
that the most important FDI country was China, however who followed after was
India. The reason for this is that there has been a large increase in the
economy development and state of the country. The areas of the foreign
investment that experienced an increase were as listed: services, construction
activities, telecommunications, computer software and hardware industries. The
leading sources of the flows of the foreign investment is the UK, US,
Singapore, and Mauritius. Pakistan captured 27%, Sri Lanka 24% and Bangladesh
%13 of the foreign capital during the years 2000-2013. As said before, Nepal
was not doing very well and had the smallest amount of inflows, 4% to be exact.

            In order to find different
determinants of the FDI and what it does for the economy foreign direct
literature is used. As said before the economic surroundings is a very important
part of encouraging the foreign direct investment. This is the interaction
between several things, including the normative, cultural, and regulative cognitive
institutional components. It is argued that “the policy and institutional
environment is an essential factor of economic growth because sound institutions
inspire productive actions and depress predatory behavior” (Gwartney, 2009). One
thing that lessons high costs for foreign investors in a very efficient market-supporting
institutional system, also this does not delay easy access to organizational
capabilities. There are certain things within economic freedom that could be
changed in order to raise FDI are: reducing government intervention, increasing
property rights protections, and lowering barriers to capital flows. Economic
freedom does have large amount of impact on FDI. The association between both economic
freedom and FDI has been studied closely in South Asian Countries between the
time frame of 1995-2008. This makes sense since markets of larger size have a
better possibility for attracting foreign investors. Another important
determining factor for FDI is the property rights protection regarding less
government intervention.  It is very
important to foreign investors to have the necessary enforcement of permitted
contracts to make sure it is definite for there to be a continuation of
business transactions. Also, FDI is changed by corruption. Therefore, there can
be problems when discretionary authority is not used correctly, when it is not
endorsed, or is not checked correctly by weaker legal frameworks in certain countries.
A higher level of security for property rights is associated with a better
capacity of certain countries that have better ability of attracting FDI easier.
With that being said it was found by Beheshtitabar and Irgaliyev (2008) that both
investment and trade freedom also have a big impact it ability of attracting
FDI as well. What this means is that it is a positive factor for FDI to reduce tariff
and non-tariff trade barriers. It was also found that the countries with lower
taxes, a corruption-free operating environment, and business friendly
regulation are a positive change for the relocation decision of foreign
investors. Having a very open economy and not having as many tariff and non-tariff
barriers is a huge enhancement for FDI to increase in countries. Imposing both
direct and non-direct taxes is a way for costs to rise for establishing and
maintaining business in foreign countries. EU studies find a negative side of higher
tax rates for FDI. Having stronger economic management, less government participation,
reducing corruption, lessening restrictions on investment, higher protection of
personal property, independence of the financial system, and labor freedom all enhance
and increase FDI. With that being said there is then an understanding that
having more freedom economically allows for FDI to have not only its best
potential but for the foreign investors in host nations to have their best chance
in foreign investments.

This
study was done my implying panel regression method, it explores what economic
freedom does for FDI in South Asian countries from 1995-2014. A positive
relationship is assumed between economic freedom and FDI stocks.

INDEPENDENT
VARIABLES

MODEL
1

MODEL
2

MODEL
3

ECONOMIC
FREEDOM

0.161
(0.068)

0.137
(0.035)

0.117
(0.044)

MARKET
SIZE

0.005
(0.001)

0.006
(0.001)

0.004
(0.001)

HUMAN
CAPITAL

0.054
(0.013)

0.046
(0.014)

0.031
(0.007)

TRADE

0.083
(0.017)

0.079
(0.016)

0.045
(0.017)

NATURAL
RESOURCES

 

0.138
(0.138)

0.051
(0.284)

QUALITY
OF INFRASTRUCTURE

 

 

3.96E-05
(1.3E-06)

CONSTANT

-12.15
(4.151)

-11.39
(4.012)

-6.859
(2.855)

DIAGNOSTIC
TEST

 

 

 

OBSERVATIONS

99

95

95

R2

0.641

0.665

0.692

ADJ.
R2

0.625

0.629

0.670

F-STATS

24.79

33.72

31.42

F
(P-VALUE)

0.000

0.000

0.000

HAUSMAN
(P-VALUE)

0.000

0.000

0.000

 

 

 

 

            The above table is a representation
of 3 different models in which FDI is a dependent variable. It is showing that an
increase in economic freedom will lead to more FDI in South Asia. This does not
only affect the improved investment in the country, it will also help with-laws,
and regulatory efficiency with open market economy. This study also has human
capital which has a positive relationship with FDI. The reason for this is it
is a straight indicator that there is a good and strong workforce, because of
that it attracted foreign investors. Another independent variable would be
trade, this is one that is scientifically important. In order to have greater
economic welfare gain it is better to have a more open market. It is less beneficial
to have a closed market. For this reason, investors like to and are more likely
to invest in countries with greater trade and open markets. Here model 2
includes natural resources, which includes ores and metal exports in South
Asian countries. Most people would say that natural resources are a key indicator
for greater FDI however, our study shows that it actually is not that big of an
indicator for more FDI. It is quite insignificant. Model 3 has infrastructure.
It is shown to have a positive effect on FDI, attracting more FDI. Even with
the value being very small, it is still a significant part. The reason for this
is better infrastructure means less transaction costs. Infrastructure provision-highways,
roads, ports, electricity, and communication networks most likely increases
productivity and because of that increases the amount of FDI. Even with
economic freedom, the market size, human capital, trade and quality of infrastructure
having a positive a significant part in FDI, while things such as natural
resources have a positive however less significant impact on this current
study. To conclude this all this study is exploring the role of the domestic
business environment measured by Heritage foundation economic freedom index in
attracting FDI in certain South Asian countries (Pakistan, Bangladesh, India,
Nepal, Sri Lanka) between 1995-2014. It is shown that economic freedom does
have a positive relationship and effect with FDI in certain South Asian
countries. The institutional climate does have an effect the flow of foreign
capital in that certain country. A larger market means more domestic demand
making it a place investors want to invest in meaning a higher FDI. Improving
economic openness, open markets, and good worker ethic will all improve the
likeliness that FDI will increase.

            Overall this study was successful in
showing what is and is not beneficial to foreign direct investment in South
Asian countries. I found this study to be quite informative.