Unveiling the Nexus: Exploring How Political Stability and Corruption Mediate the Relationship Between Macroeconomic Factors and Foreign Direct Investment in South Asia

Abstract

All global economies are sensitive to changes in the price of crude oil. Because their economies are more susceptible to external shocks, emerging nations feel the effects of fluctuations in crude oil prices more acutely. The relationship between macroeconomic factors and Foreign Direct Investment (FDI) in South Asian countries is investigated. This study will focus on the microeconomic factors and FDI in South Asian countries by investigating the variables such as interest rate, exchange rates, oil prices, inflation, and GDP levels. The primary goal is to desegregate the individual impacts of these factors in the selected South Asian economies and highlight the moderating role of governance and corruption on the linkage among these factors and foreign direct investment. The research covers the time span from 2000 to 2020 and includes such major economic crises as today’s COVID 19 pandemics. Using purposive sampling technique, data were gathered from well-knowns sources, such as, central banks of Pakistan. The regression model which was applied in the analysis gives useful results. Culture of inflation and inflation has an indirect relationship with GDP in Bangladesh which in turn affects FDI. Conversely, corruption is perceived to act as the key intermediary in shaping the linkages among these factors. In India, the FDI dynamics are governed by a multi-pronged influence, and as the inflation rates, exchange rates, oil prices, and GDP are the most important. Even though corruption is not widely regarded as a major barrier to attracting foreign capital, it proves to be a significant factor that predetermines political stability. On the other hand, Pakistan’s inflation rates and exchange rates signify great impacts on FDI; however, with oil prices rapidly affecting and GDP doing so gradually. Although corruption has been inflicted as negligible, political equilibrium acquires a substantial role in the mediation process. This study highlights the pivotal use of governmental policy tools to stabilize key economic factors and restore investors' confidence. In addition to that, it showcases the role of having political stability to get FDI across varied sectors. Policymakers are therefore advised to start from the point of coordinating strategies that will stimulate economic stability as well as political cohesion in South Asian countries.