Macroeconomic and Institutional Determinants of Foreign Direct Investment in SAARC Countries

Foreign direct investment (FDI) is considered a vital element in the development strategies of the South Asian Association for Regional Cooperation (SAARC) economies. The institutional environment and macroeconomic conditions of host countries play crucial roles in attracting FDI. This study examines the influence of macroeconomic and institutional factors on FDI in six SAARC nations – Pakistan, India, Bangladesh, Nepal, Sri Lanka, and Bhutan – from 2000 to 2020. The research explores the impact of various factors on FDI by utilizing panel data analysis methods, specifically fixed effects (FE) and two-stage least squares (TSLS). The dependent variable in this analysis is FDI inflows, while the independent macroeconomic variables include gross domestic product (GDP), financial development, inflation, and infrastructure. Institutional factors such as government effectiveness, governance level, political stability, and regulatory quality are also considered. The findings indicate that all the chosen variables significantly influence FDI inflows, except government effectiveness. SAARC governments should establish investment-friendly environments and implement fair policies to boost FDI, supporting sustainable economic growth and sustainable development goals (SDGs). This study contributes by aligning FDI strategies with global development goals, promoting inclusive growth, and improving infrastructure in the region. It extends previous research, providing deeper insights into the factors influencing FDI and its role in sustainable economic progress.