Do Macroeconomic Factors Affect FDI: Evidence from South Asian Countries

Abstract There are numerous factors such as absorptive capacity along with other are very important to make foreign direct investment (FDI) more effective for economic growth and development. There are numerous indicators of absorptive capacity such as human capital, technology, infrastructure, institutional quality, GDP per capita, and trade openness. This study determines the effect of absorptive capacity on FDI in South Asian countries over the time period 1984–2017 using system Generalized Method of Moment (GMM). The study found that absorptive indicators such as trade openness, infrastructure, institutional quality, human capital, GDP per capita, and technology are positively related to foreign direct investment in South Asian countries but human capital is the more effective determinant of FDI. Therefore it is necessary to increase human capital, free trade, infrastructure, technological innovations and institutional quality to effectively absorb the benefit and spillover effects of FDI which boosts economic growth and development.