PurposeThis paper empirically examines the relationship between foreign direct investment, financial development and other macroeconomic variables like trade openness, domestic investment and labour force and that of GDP per capita in select South Asian countries, i.e. India, Sri Lanka and Pakistan for the period 1990–2018.Design/methodology/approachThe study uses various econometrics tools such as Pedroni, Kao and Johansen–Fisher panel cointegration test, Panel FMOLS and DOLS and Granger causality in order to analyse the long-run and short-run dynamics among the variables under consideration.FindingsThe results of the panel data estimation techniques employed imply that there is a short-run causality running from GDP per capita to FDI and financial development, and results from FMOLS and DOLS indicate that FDI and financial development have positive impacts on GDP per capita in the countries under consideration.Originality/valueIn this paper, we use a dynamic macroeconomic modelling framework to examine the effect of FDI and financial development on per capita income in three major south Asian economies, which are categorized as three Non-Least Developed Contracting States under the South Asian Free Trade Area (SAFTA), 2006, established with an aim to facilitate free trade among them. Considering the diversity of the level of growth experienced by these economies, the study uses appropriate panel regression techniques. Therefore, in addition to proper formulation of policies directed towards scaling up of export and import levels, the respective authorities should also take care that the political stability and institutional quality are maintained.

Foreign direct investment, financial development and economic prosperity in major south Asian economies

Abstract In terms of cause and effect, financial development and economic growth relationship has been a major empirical issue for researchers and policy makers. This study explores the causal linkages between financial development and economic growth catering for country specificity and structural shocks pertaining to different cross sections in SAARC and ASEAN countries by calling in the bootstrapping technique proposed by Kónya (2006). We considered the panel estimation to allow for contemporaneous correlations and performed Wald test for Granger Causality with country specific bootstrap critical values catering for structural breaks. Empirical investigation reveals the existence of both the demand and supply leading phenomena for the selected period of 1980–2017. The direction of causality is sensitive measures and proxies used for financial development. 

A Causal Analysis of Financial Development and Economic Growth

This paper investigates the causal relationship between financial development and economic growth in Sri Lanka for the period 1965 to 2013 using a trivariate vector autoregressive (VAR) framework that includes investment as an additional variable. This study utilized Per Capita Gross Domestic Product (GDP) and investment (as a measurement of indirect effect) as proxies for economic growth. Money supply, bank deposits and domestic credit to the private sector, each as a percentage of GDP were used as proxies for financial development. Data analysis involved Granger causality tests using the Johansen cointegration test and Vector Error Correction Model (VECM). Results show strong long-run Granger causality of financial development to economic growth in Sri Lanka. Furthermore, results suggest evidence of bi-directional short-run causalities between bank deposits and economic growth, and unidirectional causality from money supply to economic growth. The major implication of research findings is that enhancing financial sector development policies will improve productivity and drive long run economic growth in Sri Lanka.

/pdf/financial-intermediation-development-and-economic-growth-3p23yx0dim.pdf

M. C. Dilhan De Silva

Papers

Financial Intermediation Development and Economic Growth Nexus in Sri Lanka