India & South Asia Indian Economic Reforms & Direct Foreign Investments: How Much Difference Do They Make to Neighbors?

Abstract

the issue of how it will affect neighboring economies interms of attracting FDI inflows. Does huge FDI inflows of India lead to ëinvestment creating effectí or otherwise for its neighbors? If so, do FDI inflows in India exploit the economic reforms process and thereby affect other economies in the region? In this paper, we explore these issues empirically using data for four South Asian economies (Pakistan, Sri Lanka, Bangladesh and Nepal) from 1975 to 2006 and control for other key determinants of FDI inflows. Using Chantasasawat (2004) and Mercereau (2005) approach, we develop five different methodologies to create ëIndia effectí and examine its impact on FDI inflows of its neighbors. Using all the five methods, the results suggest that the India effect is positively related to the levels of FDI inflows of its neighbors. The volatility in FDI inflows of India is not the most important factor in having a detrimental affect on inflows of FDI in the region. Finally, there is a positive spillover effect of Indian economic reforms on FDI inflows of India, which inturn is leading to increase in attractiveness of FDI of its neighbors. Also found is the negative effect of cost of reversal of Indian reforms on neighbors FDI inflows.