Examining the Dynamics of FDI and Total Factor Productivity in Selected South Asian Countries

This article examines the relationship between Foreign Direct Investment (FDI) and Total Factor Productivity (TFP) in Bangladesh, India, Pakistan, and Sri Lanka from 1982 to 2022. Using Vector Error Correction Models and Johansen cointegration on annual time‑series data, we find that FDI positively affects TFP in all four countries, with trade openness, government expenditure, and education serving as significant transmission channels. However, human capital negatively impacts TFP in Bangladesh and Sri Lanka, suggesting labor-market mismatches in these transitioning economies. The speed of error correction varies significantly: Pakistan adjusts fastest while Bangladesh adjusts slowest. Disaggregating FDI reveals that greenfield investment drives TFP gains more than cross-border M&A. Robustness checks using alternative TFP measures, instrumental variables, and panel ARDL confirm the baseline findings. Policy implications include country-specific strategies: vocational training prioritization in Sri Lanka, regulatory simplification in Pakistan, and FDI source diversification across the region.