Banking Sector Development and FDI in Emerging Markets: Evidence from the SCO using a CCE-PMG Approach

Nisar, Ghania and Bhukhari, Dr Naseem (2025): Banking Sector Development and FDI in Emerging Markets: Evidence from the SCO using a CCE-PMG Approach.

Abstract

This study investigates the relationship between domestic banking development and Foreign Direct Investment (FDI) in nine Shanghai Cooperation Organization (SCO) economies, including Pakistan, India, Iran, China, Russia, Tajikistan, Kyrgyzstan, Kazakhstan, and Uzbekistan, from 2000 to 2023. Using a panel econometric framework that combines the Pooled Mean Group (PMG) estimator with Pesaran’s Common Correlated Effects (CCE) approach, the results show a positive long-run association between banking sector development and FDI. Granger causality analysis provides evidence of a unidirectional relationship, indicating that the development of the banking sector statistically precedes and is strongly associated with foreign investment. The positive long-run association highlights the crucial role of robust banking systems as domestic anchors for investment and as key components of regional economic resilience. The results yield two principal policy implications. First, strengthening domestic banking institutions is an important national strategy for enhancing attractiveness to foreign capital. Second, the presence of strong cross-sectional dependence suggests that banking sector reforms should be complemented by awareness of regional economic linkages and common external shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking Sector Development, Bank Credit, FDI, Emerging Economies, SCO, Panel ARDL, Common Correlated Effects
• Subjects: F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; G - Financial Economics > G2 - Financial Institutions and Services; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O18 - Urban, Rural, Regional, and Transportation Analysis ; Housing ; Infrastructure; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development ; Role of International Organizations

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