Foreign Direct Investment and Industrial Production: A Comparative Study of Pakistan, Bangladesh, and India

Abstract

It is commonly believed that rising economies may acquire finance, technology, and management expertise for industrialization through foreign direct investment (FDI). Although Bangladesh, India, and Pakistan have all adopted FDI-based growth plans, their industrial success has differed. Bangladesh has had rapid industrial growth with moderate inflows, India receives relatively substantial inflows compared to GDP, while Pakistan’s industrial productivity has remained stable despite significant investment initiatives like the China–Pakistan Economic Corridor (CPEC). Using annual World Development Indicators data from 1980 to 2024, this study offers a comparative time-series analysis of the relationship between FDI and industrial production. With industrial production modelled as a function of FDI inflows, trade openness, human capital, and either domestic investment (Pakistan) or the exchange rate (Bangladesh and India), this study used the autoregressive distributed lag (ARDL) bounds testing approach to estimate long-run relationships and short-run error correction dynamics. Bounds tests confirm a long-run co-integrating relationship in all three countries. FDI has a positive and statistically significant long-run effect on industrial production in each country (coefficients of 0.353 for Pakistan, 0.422 for Bangladesh, and 0.749 for India), and a positive significant short-run effect in all three. The remaining determinants differ by country: domestic investment is negative and significant in Pakistan, trade openness is negative and significant in Bangladesh, and human capital is negatively signed in India. CUSUM and CUSUM-of-squares tests indicate stable parameters. The results suggest that FDI promotes industrial production in South Asia when it is accompanied by efficient domestic investment, human capital development, a competitive trade environment, and macroeconomic stability. Country-specific policy implications are discussed.

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