Does well banking performance attract FDI? Empirical evidence from the SAARC economies

Abstract

PurposeThis paper empirically examines the perceived relationship between banking sector performance and FDI inflows, thereby highlighting an underexplored area in the existing literature.Design/methodology/approachTo provide evidence from the South Asian context, this study selected five economies of the same region based on the data availability. A panel dataset, collected from the internationally reliable sources for the period 1998–2017, is analyzed with the help of different econometric techniques, including pooled least squares, fixed effects, generalized least square and two stages least squares.FindingsThe results indicate a significant negative relationship between banking sector performance and FDI inflows while demonstrating a significant positive association of inflation and trade openness with FDI inflows Moreover, higher per capita income, which is one of the indicators of a growing economy, exerts a statistically significant positive impact on FDI inflows. Finally, institutional factors have not played a significant role in attracting FDI in the sampled countries.Practical implicationsThe results demonstrate a unique outcome from the perspective of the relationship between banking sector performance and FDI inflows, and hence policymakers of the developing countries in general and South Asian countries in particular would benefit from the current study significantly.Originality/valueThe obtained results are original as we have provided comprehensive evidence on the relationship between FDI and banking sector performance in the SAARC context for the first time.