Bureaucratic Quality and FDI Inflows Nexus: A South Asian Perspective

The traditional factors are important for decision making process of multinationals to invest in host countries, but in developing countries transaction costs result in coordination failures. In this regard, an efficient bureaucracy is pivotal for reducing transaction costs and, thus, for promoting human interactions. For this purpose, this study has examined the relationship between bureaucratic quality and FDI inflows for selected South Asian countries (Pakistan, India, Sri Lanka and Bangladesh) during the time period 1995-2015 by controlling domestic investment, economic development, human capital, exchange rate, financial development and inflation. Using Driscoll and Kraay robust standard errors approach, the results are consistent with the economic theory of bureaucracy and FDI inflows. The study concludes that bureaucratic quality plays an important role in attracting FDI inflows to South Asia. On the basis of these estimates, this study recommends strong and efficient bureaucratic structure that imposes strong enforcement mechanism (without interrupting government policies) which may overcome the domestic coordination failures and promote new economic activities which attract multinational companies to South Asia.