Abstract:
This study investigates the nexus between foreign direct investment (FDI) and
decomposed Official Development Assistance (ODA) in five South Asian countries.
Following economic reform and improving FDI policy fame work in 90s, the South
Asian region becomes as an important destination for investment. Indeed, this region
is also destination of official development assistance for several years that directed by
donors in order to reach various objectives. Both FDI and official development
assistance are seen capital flows can develop physical and human capital in host
countries, but at the same time both can effect on each other in the way of the sense
that complementary and substitutes. Thus, this study investigates the nexus by
employing cointegration and Granger causality tests in five South Asian countries.
Using cointegration test we empirically found that there is a long-run relationship
between FDI and official development assistance for physical capital development in
Nepal, Pakistan, India and Sri Lanka, but not in Bangladesh, while the relationship
between FDI and assistance for human capital and infrastructure development is in
Bangladesh, Nepal, India and Sri Lanka, but not in Pakistan. Granger causality tests
suggest that receiving assistance for human capital and infrastructure development
working towards attracting FDI in South Asian countries. The argument that official
development assistance for physical capital development crowds out FDI is weak in
case of South Asian countries. Conclusively we suggest that receiving foreign aid in
the shape of human capital and infrastructure development encourages FDI in South
Asian region.
