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

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  • nisar, ghania

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, coordinated efforts among SCO countries are necessary to manage shared economic vulnerabilities and to improve the bloc’s collective investment appeal.

Suggested Citation

  • nisar, ghania, 2025. "Banking Sector Development and FDI in Emerging Markets: Evidence from the SCO using a CCE-PMG Approach," MPRA Paper 126205, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:126205
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    References listed on IDEAS

    as
    1. Muhammad Tahir & Md Badrul Alam, 2020. "Does well banking performance attract FDI? Empirical evidence from the SAARC economies," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 17(2), pages 413-432, October.
    2. Dumitrescu, Elena-Ivona & Hurlin, Christophe, 2012. "Testing for Granger non-causality in heterogeneous panels," Economic Modelling, Elsevier, vol. 29(4), pages 1450-1460.
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    Keywords

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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G2 - Financial Economics - - Financial Institutions and Services
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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