Report

68 QUANTIFICATION OF BENEFITS FROM ECONOMIC COOPERATION IN SOUTH ASIA
of FDI. By providing protection, BITs are expected to
promote FDI.
Based on the above discussions, to estimate the
impact of SAFTA on inward FDI into the region and
into the member countries the equation estimated is as
follows:
Inward FDI it
= α + β 1
Growth of domestic market it
+ β 2
Skill availability it
+ β 3
Labour
Cost it
+ β 4
Tariffs vis-à-vis other
SAFTA Members it
+ β Exports to
5
other SAFTA Members it
+ β 6
Imports from other SAFTA Members
it
+ β 7
Degree of Openess it
+ β 8
Number of BITs signed it
+ β 9
Import
of intermediate goods from
SAARC it
+ β Export of intermediate
goods from SAARC it
10
+ ε.
The data sources, definitions and expected signs
of the variables are presented in Table 8.8.
Empirical Results
The results are presented in Table 8.9 in columns 1–3.
An attempt is made to control the economic
fundamentals of the host country. To avoid the problem
of simultaneity between the explanatory variables and
dependent variable (i.e. log FDI), economic fundamentals
are lagged by one year. Second, the impact of
inter-regional tariffs and bilateral investment
agreements on inward FDI is analysed by using a panel
data for seven member countries of SAFTA for the
period 1980–2006. Listwise deletion is undertaken in
the case of missing data. All results presented are
corrected for autocorrelation and hetroscedasicity.
The results show that the economic fundamentals
of a SAFTA member country have a significant impact
on inward FDI. Domestic market size, low cost of
labour and availability of skills attract FDI from outside
the region. Higher trade openness attracts higher FDI.
Tariffs with respect to other SAFTA member countries
has a negative impact which indicates that lowering of
tariffs following SAFTA will attract FDI from outside
the region into the region (Table 8.9, column 1) The
coefficient indicates that the impact will be significant,
i.e. 30% of the rise in inward FDI may be because of
lowering of inter-regional tariffs. This indicates that
SAFTA may encourage FDI inflows into the member
countries and consequently into the region as a whole.
The theoretical reason for this is, as discussed above,
regional integration offers many advantages to the
inward FDI. It lowers the risk of investments, provides
Table 8.8 Variables Used, Data Sources, Definitions and Expected Signs
Variables Definition Expected Sources of Data
Sign
Potential domestic market (Growth of Log of real gross domestic product + WDI 2007
domestic firms)
Literacy rates (Skill availability) Log of secondary enrolment ratio + WDI, 2005
Efficiency wages (Labour cost) Log of labour cost/Labour productivity – UNIDO
Degree of openness Log of ratio of sum of exports and imports/GDP + COMTRADE
Tariffs vis-à-vis other SAFTA countries Log of weighted average of tariffs vis-à-vis other – TRAINS
SAFTA countries
Imports from other SAFTA member Log of imports from other SAFTA member – COMTRADE
countries as a proportion of GDP
countries as a proportion of GDP
Exports to other SAFTA member countries Log of exports from other SAFTA member + COMTRADE
as a proportion of GDP
countries as a proportion of GDP
Exports to other SAFTA Member countries Log of exports to other SAFTA Member countries + COMTRADE
as a ratio of total exports
as a ratio of total exports
Imports from other SAFTA member Log of imports from other SAFTA member + COMTRADE
countries as a ratio of total imports countries as a ratio of total imports
Import of intermediate goods from SAARC Import of intermediate goods from SAARC as a – COMTRADE
as a ratio of GDP
ratio of GDP
Export of intermediate goods from SAARC Export of intermediate goods from SAARC as a + COMTRADE
as a ratio of GDP
ratio of GDP
Number of BITs signed
Number of Bilateral Investment Treaties signed by
a country in year t (accumulated over the years)