Abstract. This study attempts to find the effect of foreign direct investment on total factor productivity (TFP) for the four major South Asian economies namely Bangladesh, Pakistan, India and Sri Lanka considering other variables such as human capital, trade openness, government expenditure and CPI as significant determining factors for TFP. The results suggest that FDI is an important determinant of TFP in South Asian region and has a significant positive impact. FDI, trade openness, government expenditure and inflation all affect TFP in the long run for all the countries under study. However, the effect of human capital on TFP in case of Bangladesh’s and Sri Lankan economy is negative. South Asia needs to promote intra-regional trade and economic policies to increase foreign investment. The countries under study are labor intensive economies and labor productivity in the region can be improved through specialized skill development programs.

Keywords: total factor productivity, foreign direct investment, education expenditure, trade openness, South Asia.