Analyzing the Effect of Bank Facilities on Private Sector Investment: Experience of the Selected Asian Countries (HPAEs)

Abstract

Sustainable economic growth and development are the main economic target of all countries in the world. Physical capital plays a vital role in achieving economic growth and its fluctuations affect the general functioning of the economy. However, there is not a perfect correlation between investment and economic growth rate, but there is a striking correlation. Countries that allocate greater proportion of GDP to investment (like Singapore and Japan) experience higher rates of economic growth, while allocating smaller proportion of GDP to investment (like Rwanda and Bangladesh) leads to lower economic growth rates. In economics, capital formation consists of two stages: mobilizing savings and investing it. Therefore, saving is the primary source of capital formation which provides the necessary funds for investment. On the other hand, the banking system is the main channel to mobilize savings and allocates them for the financing of investment projects in developing countries. The credit amount, the interest rate and the way to allocate the financial resources to economic activities have an important impact on investment level and economic performance. This research examines the effect of bank facilities on private sector investment in selected High Performing Asian Economies (HPAEs) in the period (1999-2013); using flexible accelerator theory and panel data method for estimating experimental model. Findings show a significant relation between investment and explanatory variables at 5% significance level. The positive effect of bank facilities and the negative impact of real interest rate on private investment are consistent with theoretical expectations. Furthermore, the results indicate the complementary effect of government investment and negative effect of FDI on private sector investment.