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The Impact of Governance on Foreign Direct Investment in South Asian Countries

Wanigasuriya, W.M.T.J.


Foreign Direct Investment (FDI) plays a remarkable role in the economy of every country linking to social, economic, and political factors. Since the late 1990s, there was greater attention from various scholars exploring the relationship between foreign direct investment and good governance. There are several indicators for governance. Such as voice and accountability, political stability, absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. These indicators affect FDI in various ways and at various levels. The literature it is arguing that political and institutional factors are affecting the performance of the economy to a greater extent. This study empirically examined the impact of governance on FDI in South Asia Countries namely, Sri Lanka, India, Pakistan, Nepal, Bangladesh, Afghanistan, Maldives, and Bhutan using a balanced panel data set, from 1996 to 2019. The study used six government indicators as Government effectiveness, Control of corruption, Voice and accountability, Regulatory Quality, Rule of law, and political stability. The data was extracted from Worldwide Governance Indicators (WGI) and World Development Indicators (WDI. The Generalized Method of Moments (GMM) and Two-Stage Least Squares (TSLS) show that government effectiveness, voice and accountability positively and significantly affect FDI and political stability and rule of law negatively affects FDI in South Asian countries. These results produce a sensible basis for understanding that it needs policymakers to boost and implement sound laws still as a stable business environment to draw in FDI into rising countries.


KEYWORDS: Foreign direct investment, Generalized method of moments, Governance, South Asia