Role of governance in attracting foreign direct investment inflow: empirical evidence from South Asia region

Abstract

The inflow of FDI brings many economic benefits including more employment opportunities, sharing of modern knowledge, and the transfer of needed capital to aid the depressing domestic investment. In view of this, the current study aims to find out the empirical impact of the governance quality of the host country on FDI inflow. The empirical analysis was arranged by sampling the 20-year (2000-2019) financial statistics of 8 South Asian economies. For regression assessment, we employ FMOLS and DOLS models and estimate the coefficients in the long run. The empirical analysis discloses the positive significant role of the aggregate governance index on FDI inflow, implying that better governance can uplift the inflow of FDI. In addition, the empirical results disclose the negative impact of the inflation rate, while the significant positive impact of trade volume, population growth, labor force, and financial development on FDI inflow. The empirical analysis yields vital policies both for domestic policy officials and foreign investors. Primarily, it is recommended to focus on improving the governance situation to attract more FDI. This study enriches the literature by showing the interplay between governance and FDI inflow and has equal policy implications for other developing economies of the world.

IMPACT STATEMENT

This study examines how governance quality influences foreign direct investment (FDI) in South Asia. The findings reveal that strong governance frameworks characterized by political stability, regulatory quality, and control of corruption, etc., significantly boost FDI inflows. By improving governance standards, South Asian countries can create a more attractive environment for foreign investors, promoting economic growth and regional development. This research underscores the critical role of governance in shaping investment inflow and provides actionable insights for policymakers aiming to enhance FDI attraction.

Keywords:

• Foreign direct investment
• financial development
• governance quality
• population growth
• South Asia

Reviewing Editor:

• Chris Chris, Aston University, Economics, Finance & Entrepreneurship, UK

Subjects:

• Economics
• Political Economy
• Development Policy

JEL CLASSIFICATION:

• F21
• F14
• G38

Authors’ contributions

Mosab I. Tabash: supervision, writing original draft, data curation; Umar Farooq: conceptualization, data curation, writing-original draft preparation; Ali Matar: supervision, reviewing and grammar check, methodology, funding acquisition; Mujeeb Saif Mohsen Al-Absy: funding, statistical analysis, policy recommendations.

Data availability statement

Data that support the findings of this study available at public domains name World Development Indicators, and World Governance Indicators, The World Bank.

Disclosure statement

All authors hereby declare that that we have no conflict of interest that can interrupt the review process or publication process.

Informed consent

We hereby grant the consent and acknowledge that paper should be sent for peer review, or any other publication process required by journal.

Additional information

Notes on contributors

Mosab I. Tabash

Mosab I. Tabash is currently working as MBA Director and Associate Professor of Finance at the College of Business, Al Ain University, UAE. He obtained his Doctor of Philosophy (Ph.D.) in Finance from the Faculty of Management Studies (FMS Delhi). His research interests include Islamic banking and finance, monetary policies, corporate governance, financial performance, investments, tourism and risk management.

Umar Farooq

Umar Farooq is a Ph.D. (applied economics) scholar at the school of Economics and Finance, Xian Jiaotong University, China. Currently, his Ph.D. is at the final stage. His main research interest includes corporate finance and investment, financial economics, environmental economics, and macroeconomic theory and practices. He has recently published papers in peer-reviewed journals including the Borsa Istanbul Review, Research in International Business and Finance, Journal of Cleaner Production, International Journal of Finance and Economics, Energy Policy, Energy, Bulletin of Economic Research, International Review of Administrative Sciences, Resources Policy. He is also working as an active reviewer in several peer-reviewed journals.

Ali Matar

Ali Matar is an Associate professor in Financial Economic and currently he is the Dean of Scientific Research at Jadara University, Irbid, Jordan.

Mujeeb Saif Mohsen Al-Absy

Mujeeb AL-Absy is an assistant professor, Department of Business Management, Abs Community College, Hajjah, Yemen, currently working as a visiting faculty member in the Department of Accounting and Finance, College of Administrative and Financial Sciences, Gulf University, Bahrain. He obtained his Master and PhD degrees from the School of Accountancy, College of Business, Universiti Utara Malaysia, Malaysia and a BSc degree from the College of Commerce and Economics, majoring in accounting, from Hodeidah University, Yemen. Dr. Mujeed has several articles published in Scopus journals; some of them also indexed by ISI. He has presented his working ideas at several international conferences in Malaysia. He has reviewed several international papers published in high-indexed journals. Professionally, Dr. Mujeeb has 6 years of working experience as an accountant at Salah Al-Awadi industrial complex, Hodeidah, Yemen.