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I MPACT OF SAFTA ON INWARD AND OUTWARD FOREIGN DIRECT INVESTMENTS 69<br />
Table 8.9 Impact of Tariffs within SAARC on Inward FDI<br />
Dependent Variable: Log of FDI<br />
Variables (1) (2) (3)<br />
Market growth 0.20*** 0.39*** 0.45***<br />
(2.42) (4.58) (4.86)<br />
Literacy rate 0.179** 0.11 0.15*<br />
(2.47) (1.39) (1.71)<br />
BITS 0.69*** 0.60*** 0.56***<br />
(5.61) (4.62) (3.82)<br />
Efficiency wages –0.50*** –0.45*** –0.51***<br />
(–3.43) (–2.87) (–2.99)<br />
Openness 0.14*** 0.37** –<br />
(2.38) (2.14)<br />
Weighted average of tariffs vis-à-vis other SAFTA –0.30* – –<br />
member countries (–1.79)<br />
Total exports to SAARC as a ratio of GDP – – 0.30**<br />
(1.94)<br />
Total imports from SAARC as a ratio of GDP – 0.39***<br />
(2.52)<br />
Total exports to SAARC as a ratio of total exports –0.09 –<br />
(–0.76)<br />
Total imports of intermediate goods from SAARC 0.20** –<br />
as a ratio of total imports (2.15)<br />
Constant 24.7 101.7 20.5***<br />
(1.00) (0.76) (94.52)<br />
Observations 133 182 182<br />
Hausman statistic 2.84prob value: 0.82 2.38prob value: 0.12 2.28prob value: 0.89<br />
Note: * significant at 1%; ** significant at 5%; and *** significant at 10%.<br />
access to larger market and provides the opportunity to<br />
reap economies of scale by locating in the least cost country<br />
and supplying to other member countries and it may<br />
also lead to product fragmentation, i.e. vertical FDI.<br />
To assess whether SAFTA will encourage vertical<br />
FDI or not, the impact of share of SAFTA member<br />
countries in imports of intermediate goods on inward<br />
FDI is examined. The results presented in Table 8.9<br />
(column 2) show that the imports of intermediate goods<br />
in the host country have a significant impact on inward<br />
FDI. In other words, higher the probability of importing<br />
intermediate goods into the host country more<br />
attractive will be the destination for inward FDI. SAFTA<br />
may therefore encourage vertically-integrated FDI.<br />
However, share of SAFTA member countries in total<br />
exports of the destination country does not have any<br />
significant impact indicating that inward FDI may not<br />
necessarily be attracted to countries with higher exports<br />
to SAARC as a proportion of total exports. But, results<br />
presented in column 3 of Table 8.9 shows that total<br />
exports to SAARC as a ratio of GDP of a country may<br />
in have positive impact on inward FDI. SAFTA may<br />
therefore encourage vertically integrated FDI which may<br />
boost exports of the destination country.<br />
Apart from the trade-related variables the results<br />
show that Bilateral Investment Treaties (BITs) signed<br />
by the host country has a significant impact on inward<br />
FDI flows. This indicates that the extent to which the<br />
operations of FDI are facilitated in the host country<br />
may impact the decisions of foreign investors.<br />
CONCLUSION<br />
The results of the chapter show that SAFTA may not<br />
only lead to higher intra-regional trade but may also<br />
induce higher inflow of foreign direct investments into<br />
the region. The increasing linkages between trade and<br />
FDI may enforce higher FDI to flow into the region.<br />
Higher imports of intermediate goods into a country<br />
and higher exports from the country are found to<br />
significantly attract inward FDI which suggests that FDI<br />
into the region may be both market seeking as well as<br />
efficiency seeking. SAFTA may therefore encourage<br />
vertically integrated FDI into the region.