Economic Freedom, Exchange Rates Stability and FDI in South Asia.

Zafar Mueen Nasir, Arshad Hassan


This study empirically examines the role of economic freedom,
market size and exchange rates in attracting foreign direct investment
in south Asian countries for the period 1995-2008 by employing panel
data analysis in fixed effect setting. Results clearly indicate the
presence of significant positive relationship between economic freedom
and FDI inflows in South Asian countries during the period of study. The
real effective exchange rate was having negative association with it
indicating that depreciation in host country currency negatively
influences the inflow of FDI to that country. Therefore, monetary policy
should focus on providing stability to currencies of host countries. The
model explains approximately 90 percent of total variation in FDI. The
paper concludes that South Asian countries should make concerted efforts
in devising polices that improve level of economic freedom. In other
words, they should provide more investment friendly climate, trade
openness, efficient monetary and fiscal policies and freedom from
corruption. This can help to attract more foreign direct investment in
the South Asian countries.

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