DRIVERS OF INDUSTRIAL DEVELOPMENT IN SOUTH ASIA: COMPARING PMG AND MG ESTIMATES OF FDI AND GOVERNMENT EFFECTIVENESS

Abstract

This paper empirically examines the factors that influence industrial development in South Asian economies (Bangladesh, Nepal, Bhutan, India, Sri Lanka, and Pakistan), specifically how foreign direct investment (FDI) and government effectiveness affect industrial development, in the years 2004 to 2022. The region has an interesting case to study because of the different industrial arrangements, institutional differences, and the dire need of the sustainable structural change. The study uses panel data of six South Asian nations to identify the difference between long-run equilibrium and short-run dynamic adjustments using the Pooled Mean Group (PMG) and Mean Group (MG) estimators in an Autoregressive Distributed Lag (ARDL) model. All the findings point to the fact that industrial development in South Asia is essentially a long-run structural process driven largely by economic growth and trade openness, whereas FDI has an unexpected negative impact that contradicts the common wisdom. The popularity of the MG model helps to realize how country-specific industrial policies are more important than uniform strategies at the regional level. Policy-wise, these findings imply that South Asian economies need to be out of the traditional approach of only attracting FDI, but emphasize on how to enhance the quality, sectoral destination and industrial connection of foreign investment. Long-term industrial transformations require the strengthening of governance, encouraging export-oriented industrial competitiveness, effective management of urbanization, and encouraging industrial practices that are ecologically friendly. This research adds to the literature by generating strong econometric data on the non-homogeneous determinants of industrial growth in South Asia and states of action policy recommendations sensitive to the various structural features of the region.

Keywords:

Foreign Direct Investment, Government Effectiveness, Industrial Development, South Asia, PMG-ARDL, MG-ARDL.