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

Ghania Nisar

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Banking Sector Development; Bank Credit; FDI; Emerging Economies; SCO; Panel ARDL; Common Correlated Effects (search for similar items in EconPapers)
JEL-codes: F36 F38 G2 O16 O18 O19 (search for similar items in EconPapers)
Date: 2025-09-17
New Economics Papers: this item is included in nep-fdg
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