Surreal cityscape representing Foreign Direct Investment in South Asia.

Unlocking Growth: A Deep Dive into FDI in South Asian Economies

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Nico Varela in Business & Economy December 2025 • 5 min read.

"Discover the key factors driving foreign investment and its impact on growth in Bangladesh, India, Pakistan, and Sri Lanka."


In the dynamic landscape of emerging economies, South Asia has increasingly captured the attention of global investors, particularly since the liberalization policies of the 1990s and early 2000s. Countries like India, Pakistan, Bangladesh, and Sri Lanka have witnessed a surge in Foreign Direct Investment (FDI), prompting researchers and policymakers to scrutinize its effects on their economies. This analysis will explore the determinants and growth effects of FDI in these key South Asian nations.

Understanding the flow of FDI into South Asia requires a closer look at the source countries. The United Kingdom, United States, Mauritius, Netherlands, Singapore, Germany, France, Japan, Republic Korea, Switzerland, China, Saudi Arabia, Germany, United Arab Emirates, Malaysia, Canada, Egypt and Norway have all increased their private investments in the region, particularly after 2000. This surge raises critical questions about what makes these nations attractive destinations for foreign capital.

While FDI inflows into South Asia have shown tremendous growth, they still lag behind other Asian countries. This prompts a crucial investigation into the factors that either attract or deter FDI. What principles define these investment flows, and how can South Asian economies optimize these conditions for sustainable growth? This article will delve into these questions, offering insights relevant to investors, policymakers, and anyone interested in the economic trajectory of South Asia.

What Drives FDI in South Asia? Pulling, Pushing, and the Business Cycle

Surreal cityscape representing Foreign Direct Investment in South Asia.

Numerous factors influence where FDI lands, but their significance can vary depending on a nation's political, economic, and legal environment. A study using a gravity model approach, which considers factors like market size, distance, and economic growth, reveals key drivers of FDI in South Asia. The findings emphasize the importance of both the host and home countries characteristics in shaping investment flows.

The 'gravity model' examines how economic masses (GDP) and distances influence interactions between countries. This research shows that FDI is significantly influenced by the economic growth of both the host and home countries. This suggests that business cycles play a crucial role, acting as both 'pull' factors (attracting investment to growing economies) and 'push' factors (driving investment from slowing economies).

  • Growth Matters: Both home and host country growth rates positively impact FDI.
  • Distance Deters: Greater distance between countries negatively affects FDI flows, reflecting increased transaction costs.
  • Market Size: Larger populations in host countries correlate with higher FDI, indicating the importance of market potential.
  • Human Capital: Improvements in the Human Development Index (HDI) positively influence FDI, highlighting the role of skilled labor and education.
  • Infrastructure: Electricity consumption per capita, a proxy for infrastructure development, attracts FDI.
The study also uncovers the role of cyclical effects, indicating that consistent trends impact FDI flows across South Asian countries. This suggests that broader economic conditions and global events can significantly influence investment decisions. Additionally, trade openness, measured by trade openness index, human development index, population, and infrastructure development significantly impact FDI inflow into South Asian countries. These findings highlight the multifaceted nature of FDI determinants, extending beyond simple economic indicators.

FDI's Impact: Supporting Growth in South Asia

While the determinants of FDI are important, understanding its impact on economic growth is equally critical. Research indicates that FDI has a positive and significant association with growth rates in South Asian countries. The affect of FDI on growth rate is average. Foreign aid, labor force and gross domestic capital formation are additional variables that shows significance on economic development in South Asia. This suggests that FDI contributes to economic expansion, though its effects might be average supportive in these economies. Interestingly, the study highlights that foreign aid and FDI may have a complementary relationship, where aid helps facilitate greater FDI inflows.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

Everything You Need To Know

1

What exactly is Foreign Direct Investment (FDI), and why is it considered important for economies?

Foreign Direct Investment (FDI) refers to investments made by companies and individuals in one country into business interests located in another country. It is significant because it can lead to economic growth in the recipient country, bringing in new technologies, creating jobs, and boosting productivity. However, the level of impact of FDI can be quite variable.

2

What are the main factors that determine where Foreign Direct Investment (FDI) goes?

The flow of Foreign Direct Investment (FDI) is influenced by a few factors. The growth rate of both the investor's home country and the recipient country are key factors. The physical distance between the countries involved also plays a role, since greater distance typically means higher transaction costs. The population size and development in a country (measured by the Human Development Index, or HDI) also matters.

3

What is the 'gravity model,' and how is it used to understand Foreign Direct Investment (FDI) in South Asian economies?

The 'gravity model' is an economic model that predicts trade and investment flows between countries based on their economic size (typically GDP) and the distance between them. In the context of South Asian economies, this model helps in understanding how factors such as market size and proximity influence Foreign Direct Investment (FDI).

4

What does it mean when we talk about 'pulling' and 'pushing' forces influencing Foreign Direct Investment (FDI)?

The pulling and pushing forces in FDI refer to factors that either attract or deter investment flows. 'Pull' factors include strong economic growth, political stability, and favorable regulatory environments, which attract foreign investment. 'Push' factors are conditions in the investor's home country that compel them to invest abroad, such as economic slowdowns or saturated markets. Additionally, the business cycle, encompassing economic expansions and contractions, significantly affects these investment decisions.

5

Besides Foreign Direct Investment (FDI), what other factors can help economies to develop in South Asia?

Several variables significantly impact economic development in South Asia. The study suggests that Foreign Direct Investment (FDI) has a positive impact on growth rates. Foreign aid, the size and quality of the labor force, and gross domestic capital formation also contribute to economic advancement. Foreign aid can play a complementary role, facilitating greater FDI inflows, which can then boost economic growth.

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