Foreign capital and growth nexus revisited: empirical evidence from South Asian countries

Abstract

This paper examines the effectiveness of foreign capital in the form of FDI, remittances, and foreign aid in improving economic growth prospects in the South-Asian region. A sample of 8South Asian countries for the period 1990–2017 is being considered for this study. The study uses various econometrics tools such as the Johansen-Fisher Panel cointegration test, Panel FMOLS, and PDOLS to ascertain the long-run and short-run dynamics among the variables under consideration. We found that the long-run and short-run relationship exists among foreign aid, economic growth with other macroeconomic variables. Further, using the Granger causality framework, we found that unidirectional causality exists between foreign aid to economic growth, FDI inflows to economic growth, and there is no short-run causality between remittances and economic growth. On the other hand, we confirmed that the existence of long-run causality between foreign aid to economic growth and FDI to economic growth.

Keywords:

• Foreign aid
• FDI
• remittances
• economic growth
• South Asian countries

JEL CLASSIFICATION:

• I22
• O47
• F4
• F62

Acknowledgments

The authors are grateful to the editor, associate editor, and anonymous referees of the journal for their extremely useful suggestions for the improvement of this paper. The usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Nihar Ranjan Jena

Dr. Nihar Ranjan Jena has completed his PhD from Department of Economics, Research Centre of University of Mumbai, University of Mumbai in Macroeconomics. He has published many articles on international trade and finance.

Narayan Sethi

Dr. Narayan Sethi is an Associate Professor of Economics at the Department of Humanities and Social Sciences, National Institute of Technology (NIT) Rourkela, India. His publications include four books and 35 research papers in international journals such as Energy Policy, Economic analysis and policy, Utilities Policy, Singapore Economic Review, International Journal of Social Economics and Transnational Corporation Review etc. Dr. Sethi is also currently serving as Associate editor in Journal of Public Affairs and SN Business and Economics.