Abstract
This study examines the relationship between FDI and financial market development (FMD)
in the existence of other aspects, i.e., governance, social, and macroeconomic variables. The
study uses the annual panel data of four emerging South Asian countries, i.e., Bangladesh,
India, Pakistan, and Sri Lanka, from 1994 to 2016. Panel ARDL model is used to examine the
long run and short-run relationship, while correlation and causality analysis is used to
examine the relationship between FDI and FMD variables. Results show that exchange rate,
governance, inflation, and real GDP growth rate are the significant predictors of FDI in South
Asian countries, while FDI, education, real GDP growth rate, balance, exchange rate, and
inflation are the main determinants of FMD. A positive correlation exists between FDI and
FMD variables. However, bi-directional causality exists between CREDIT and FDIGDP,
while no causality exists between CCB and FDIGDP; however, one-way causality exists from
STKMKRTCAP and STKVOLTRA to FDIGDP. Our study suggests that countries having
better governance have an edge in attracting FDI to the country. However, we have not been
able to exploit the benefits, and the policymakers need to devise appropriate policies to attract
FDI in South Asian countries.
Saira Ahmed, Kashif Munir, Hadeeqa Nadeem. (2019) Relationship between Foreign Direct Investment & Financial Market Development - Evidence from South Asian Markets, Journal of Independent Studies and Research-Management, Social Sciences and Economics, Volume-17, Issue-2.
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