Abstract
The study examines the nexus between FDI, institutional quality, and financial development in Pakistan. We believe that it is a novel research attempt as it covers both democratic and non-democratic regimes. We use linear ARDL methodology to predict the nature of the relationship as a baseline estimator and Granger causality as a robustness check for further validation of results. The study covers the period from 1990 to 2018. We find that both FDI and institutional quality positively affect financial development in Pakistan. We find bi-directional causality between financial development and institutional quality and a unidirectional casualty between FDI and institutional quality. Likewise, we also find a unidirectional causality between FDI and financial development, running from financial development to FDI. The study has some managerial implications for policymakers to strengthen the country’ macroeconomic environment and to encourage institutional reforms to boost up the confidence of local as well as foreign investors.
Highlights
The study examines the nexus between foreign direct investment (FDI), institutional quality, and financial development in Pakistan
All these facts provided a very pleasant and attractive environment to foreign investors, and the overall investment increased by 23% of the GDP while the Pakistan economy was financed with 14 billion of foreign direct investment
FDI positively and significantly associated with Financial Development (FD) and a one percent increase in FDI inflow leads to 1 percent increase in financial development
Summary
The study examines the nexus between FDI, institutional quality, and financial development in Pakistan. The study covers the period from 1990 to 2018 We find that both FDI and institutional quality positively affect financial development in Pakistan. Encontramos que tanto la IED como la calidad institucional afectan positivamente el desarrollo financiero en Pakistán. Countries with better institutional qualities smoothly function, perform, and contribute to the financial development which resultantly promotes overall economic growth (Butkiewicz & Yanikkaya, 2006). The institutional quality variable i.e. corruption affects the volume of investment by foreign investors in the host country (Knack & Keefer, 1995). Cristina Jude and Levieuge (2015) assert that institutional quality can indices more investment due to the structural rule of law and governance system, which directly affect the countries financial development and overall economic growth. The study contributes to the body of literature in a way as previously no such a study has yet accounted for both democratic and non-democratic eras
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