The Unrevealing Nexus between Foreign Direct Investments, Institutional Quality and Financial Development in 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.