The Unrevealing Nexus between Foreign Direct Investments, Institutional Quality and Financial Development in Pakistan
Keywords:
Foreign Direct Investments, Institutional Quality, Financial Development, ARDL, Pakistan.
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.
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References
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Dang, D. A. (2013). How foreign direct investment promote institutional quality: Evidence from Vietnam. Journal of Comparative Economics, 41(4), 1054-1072.
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De Mello, L. R. (1999). Foreign direct investment-led growth: evidence from time series and panel data. Oxford economic papers, 51(1), 133-151.
Desbordes, R., & Wei, S. J. (2017). Foreign direct investment and external financing conditions: evidence from normal and crisis times. The Scandinavian Journal of Economics, 119(4), 1129-1166.
Do, Q.-T., & Levchenko, A. A. (2004). Trade and financial development. The World Bank.
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Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society, Vol. 55, No. 2, 251-276.
Falki, N. (2009). Impact of foreign direct investment on economic growth in Pakistan. International Review of Business Research Papers, 5(5), 110-120.
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Frimpong Magnus, J., & Oteng-Abayie, E. F. (2006). Bounds testing approach: an examination of foreign direct investment, trade, and growth relationships. American Journal of Applied Sciences, Forthcoming, 3(11).
Gani, A. (2007). Governance and foreign direct investment links: evidence from panel data estimations. Applied Economics Letters, 14(10), 753-756.
Gastanaga, V. M., Nugent, J. B., & Pashamova, B. (1998). Host country reforms and FDI inflows: How much difference do they make? World Development, 26(7), 1299-1314.
Globerman, S., & Shapiro, D. (2002). Global foreign direct investment flows: The role of governance infrastructure. World Development, 30(11), 1899-1919.
Globerman, S., Shapiro, D., & Tang, J. J. (2004), Foreign Direct Investment in Emerging and Transition European Countries. Emerging European Financial Markets: Independence and Integration Post-Enlargement, Volume 6.
Goldsmith, R. W. (1969). Financial structure and development. Volume Publisher: NBER
Görg, H., & Greenaway, D. (2004). Much ado about nothing? Do domestic firms really benefit from foreign direct investment? The World Bank Research Observer, 19(2), 171-197.
Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: journal of the Econometric Society, Vol. 37 (3), 424-438.
Gurley, J. G., & Shaw, E. S. (1967). Financial structure and economic development. Economic Development and Cultural Change, 15(3), 257-268.
Haber, S. H., North, D. C., & Weingast, B. R. (2008). Political institutions and financial development. Stanford University Press.
Hansen, H., & Rand, J. (2006). On the causal links between FDI and growth in developing countries. World Economy, 29(1), 21-41.
Hanson, G. H., Mataloni Jr, R. J., & Slaughter, M. J. (2001). Expansion strategies of US multinational firms. NBER Working Paper Nº 8433
Havranek, T., & Irsova, Z. (2011). Estimating vertical spillovers from FDI: Why results vary and what the true effect is. Journal of International Economics, 85(2), 234-244.
Henisz, W. J. (2000). The institutional environment for multinational investment. The Journal of Law, Economics, and Organization, 16(2), 334-364.
Islam, R., & Montenegro, C. (2002). What Determines the Quality of Institutions?” background paper for the World Development Report 2002: Building Institutions for Markets.
Javorcik, B. S., Saggi, K., & Spatareanu, M. (2004). Does it matter where you come from? Vertical spillovers from foreign direct investment and the nationality of investors. World Bank Policy Research Working Paper (3449).
Jiménez, A., & Delgado-García, J. B. (2012). Proactive management of political risk and corporate performance: The case of Spanish multinational enterprises. International Business Review, 21(6), 1029-1040.
Johansen, S. (1995). Identifying restrictions of linear equations with applications to simultaneous equations and cointegration. Journal of econometrics, 69(1), 111-132.
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bulletin of Economicsstatistics, 52(2), 169-210.
Johnson, A., & Dahlström, T. (2004). Bureaucratic corruption, MNEs and FDI. Working Paper Series in Economics and Institutions of Innovation 82, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
Jude, C., & Levieuge, G. (2013). Growth effect of FDI in developing economies: The role of institutional quality. MPRA Paper No. 49321.
Jude, C., & Levieuge, G. (2015). Growth effect of FDI in developing economies: the role of institutional quality. The world Economy, Vol 40 (4)
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Published
2021-01-28
How to Cite
Zeeshan, M., Han, J., Rehman, A., & Afridi, F. E. (2021). The Unrevealing Nexus between Foreign Direct Investments, Institutional Quality and Financial Development in Pakistan. Amazonia Investiga, 9(36), 22-37. https://doi.org/10.34069/AI/2020.36.12.2
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