Alam, Md. Bad ul; Tahi , Muhammad; Ali, No ulazidah Oma
A icle
Do c edi isks de e FDI? Empi ical e idence om he
SAARC coun ies
Jou nal o Economics, Finance and Adminis a i e Science
P o ided in Coope a ion wi h:
Uni e sidad ESAN, Lima
Sugges ed Ci a ion: Alam, Md. Bad ul; Tahi , Muhammad; Ali, No ulazidah Oma (2024) : Do c edi
isks de e FDI? Empi ical e idence om he SAARC coun ies, Jou nal o Economics, Finance and
Adminis a i e Science, ISSN 2218-0648, Eme ald Publishing Limi ed, Bingley, Vol. 29, Iss. 57, pp.
42-56,
h ps://doi.o g/10.1108/JEFAS-09-2021-0191
This Ve sion is a ailable a :
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Do c edi isks de e FDI?
Empi ical e idence om he
SAARC coun ies
Md Bad ul Alam
Jahangi naga Uni e si y, Sa a , Bangladesh
Muhammad Tahi
COMSATS Uni e si y Islamabad, Abbo abad Campus, Abbo abad, Pakis an, and
No ulazidah Oma Ali
Uni e si i B unei Da ussalam, Gadong, B unei Da ussalam
Abs ac
Pu pose –This pape makes a no el a emp o es ima e he po en ial impac o c edi isk on o eign di ec
in es men (FDI he ea e ), he eby ocusing on a comple ely unexplo ed a ea in he exis ing empi ical
li e a u e.
Design/me hodology/app oach –To p o ide a comp ehensi e unde s anding o he ela ionship be ween
c edi isk and FDI in lows, he s udy inco po a es all he eigh -membe economies o he Sou h Asian
Associa ion o Regional Coope a ion (SAARC he ea e ) and analyzes a panel da a se , o e he pe iod 2011 o
2019, ex ac ed om he Wo ld De elopmen Indica o s, using he sui able econome ic echniques o he
e icien es ima ions o he speci ied models.
Findings –The esul s indica e a nega i e and s a is ically signi ican ela ionship be ween he c edi isk o
he banking sec o s and FDI in lows. Simila ly, ma ke size and in la ion a e appea o be he wo o he main
ac o s behind he inc easing FDI in lows in he SAARC membe economies. In e es ingly, he size o he
ma ke became i ele an in a ac ing FDI in lows when he Indian economy is excluded om he sample due
o i s highe economic weigh . On he o he hand, FDI in lows a e no dependen on he le el o ade openness,
wi h mos o he speci ica ions showing ei he an insigni ican o nega i e coe icien o he a iable.
P ac ical implica ions –The ob ained esul s a e unique and obus o al e na i e me hodologies, and
hence, he SAARC economies could conside hem as he c i ical inpu s in o mula ing he app op ia e policies
on FDI in lows.
O iginali y/ alue –The indings a e unique and o iginal. The au ho s ha e es ablished a ela ionship
be ween c edi isk and FDI o he i s ime in he SAARC con ex .
Keywo ds FDI, C edi isk, Banking sec o , SAARC
Pape ype Resea ch pape
1. In oduc ion
Fo eign di ec in es men (FDI he ea e ) helps mul ina ional en i ies (MNEs he ea e ) o
pene a e new ma ke s by opening subsidia ies ab oad. The MNEs could be a ac ed by
many a ou able ac o s o he eme ging economies, o example, he e e -g owing local
needs, abundan na u al esou ces and cheap labou o ce, which a e a ew o he many (Alam
e al., 2023). On he con a y, he ecipien coun ies, owing o hei capi al de ici s, a e
supposed o welcome inwa d FDI o bene i om i s many posi i e ex e nali ies, including
JEFAS
29,57
42
JEL Classi ica ion —C51, F37, G21
© Md Bad ul Alam, Muhammad Tahi and No ulazidah Oma Ali. Published in Jou nal o
Economics, Finance and Adminis a i e Science. Published by Eme ald Publishing Limi ed. This a icle
is published unde he C ea i e Commons A ibu ion (CC BY 4.0) licence. Anyone may ep oduce,
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The cu en issue and ull ex a chi e o his jou nal is a ailable on Eme ald Insigh a :
h ps://www.eme ald.com/insigh /2077-1886.h m
Recei ed 23 Sep embe 2021
Re ised 14 Decembe 2021
6 Augus 2022
22 Feb ua y 2023
Accep ed 24 May 2023
Jou nal o Economics, Finance and
Adminis a i e Science
Vol. 29 No. 57, 2024
pp. 42-56
Eme ald Publishing Limi ed
2077-1886
DOI 10.1108/JEFAS-09-2021-0191
highe economic g ow h, new employmen gene a ions, echnological knowledge and
o wa d and backwa d in eg a ion wi h he mains eam indus ies (Dao and Ngo, 2022).
Gi en he me i s o FDI, he policymake s o he Sou h Asian Associa ion o Regional
Coope a ion (SAARC) ha e made se e al ini ia i es, including lowe a i s, a s able o eign
exchange a e and a suppo i e en i onmen o c oss-bo de ade (Shah and Khan, 2016).
F om Figu e 1, we see ha , in he case o all he majo SAARC coun ies excep Nepal, FDI
in lows had been inc easing om 1999 o 2007 be o e hey plunged in 2008 due o he
inancial c isis h oughou he wo ld. In he 1990s, membe coun ies o he SAARC ini ia ed
ade libe alisa ion policies by p omo ing p i a isa ion, adop ing a ou able expo policies
and opening in es men windows o o eign in es o s. These de egula ion s a egies
esul ed in a su ge in FDI in lows in o he egion (A i e al., 2020). A e eco e ing om he
global inancial c isis, he coun ies esumed a ac ing inwa d FDIs o 0.5%–1% o hei
GDPs om 2011 o 2019.
Despi e he consis en FDI in lows in o he SAARC egion o e he las decade, he
membe coun ies should a ac mo e o eign capi al o p omo e economic g ow h (Jena and
Se hi, 2021). Acco ding o he p e ious s udies, ma ke size, ade openness, ins i u ional
quali y, physical in as uc u e and in la ion a e o he des ina ion coun ies appea o be he
key o ces o FDI in lows (Demi han and Masca, 2008;Rahman, 2016;Asi and Majid, 2018;
Mahmood e al., 2019;Iqbal e al., 2019;Uddin e al., 2019;Tahi and Alam, 2022;Shahbaz e al.,
2021). Howe e , he s udies should ha e ocused on he necessi y o he local inancial sys em,
he eby igno ing he ac o s associa ed wi h he co po a e inancial decisions o o eign
subsidia ies. Bili e al. (2019) con i med ha he a ailabili y o ex e nal deb unding in he
local inancial ma ke s signi ican ly in luences he MNEs o choose he loca ions o o eign
a ilia es and de e mines he ypes o a ilia e sales as well.
The s udy claims ha local inancial ins i u ions could play a key ole by p o iding
wo king capi al inancing, he eby acili a ing o eign a ilia es o expo o o he coun ies.
In ano he s udy, Agga wal and Kyaw (2008) a gue ha ma ke -seeking FDI i ms a e
supposed o ake loans om local inancial ins i u ions owing o some ac o s in he hos
coun ies, including ex e nal c edi a ailabili y, high ax a e and dep ecia ing local cu ency.
The s udy u he posi s ha FDI i ms end o ollow he capi al s uc u es o domes ic i ms
ope a ing in he same indus ies due o simila cash low pa e ns. Hence, he FDI i ms
compe ing in he local ma ke s will likely access ex e nal c edi s om domes ic inancial
ins i u ions i he local inancial sys em is e icien .
–0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Bangladesh India Nepal Pakis an S i Lanka
Sou ce(s): Own elabo a ion
Figu e 1.
Inwa d FDI as a
pe cen age o GDP
C edi isks
and FDI
43
To ha e a pa adigm shi om he con en ional amewo k o in e na ional economics, Foley
and Mano a (2015) emphasised he necessi y o easy access o inance in mul ina ional
ope a ions and all o he immo able physical capi al ac o s, which could be decisi e in
opening a o eign subsidia y. Howe e , he c edi isk ep esen ed by he numbe o bad
loans could hampe he s abili y o he banking sec o s (P iyadi e al., 2021). In ano he s udy,
Hani ah (2016) a gues ha a highe le el o non-pe o ming loans (NPLs he ea e ) e odes he
inancial condi ion o indi idual banks, being a h ea o he o e all banking sec o .
To demons a e he de imen al e ec o c edi isk, Isae and Masih (2017) concluded ha i
could p ohibi comme cial banks om pe o ming hei c ucial inancing ole, making hem
less capable o acili a ing a na ion’s economic g ow h.
Gi en he pa amoun impo ance o c edi isk educ ion, all h ee Basel Acco ds ha e
gi en special a en ion o minimising NPLs o he soundness o he banking sec o .
In addi ion, Be ge e al. (2010) a gue ha banks could be ulne able o c edi isk owing o
hei less di e si ica ion ac oss di e en indus ies and sec o s. To educe c edi isk, banks
o hos coun ies should inance FDI p ojec s se ing new indus ies wi h inno a i e
p oduc s and se ices. Howe e , he inancial ins abili y caused by he high numbe o NPLs
could ha m he inbound FDI p ojec s i hey wan o ul il hei u he inancing
equi emen s.
As inwa d FDI seems o ely on he sound inancial sec o s o he ecipien s, he SAARC
coun ies ha e been inc easing he le el o p i a e sec o c edi s o e he las decade.
Howe e , ex ending esh c edi s could be se iously in e up ed as comme cial banks need o
make loan loss p o isions o he exis ing NPLs om hei ea nings (Kella d e al., 2022). Mo e
impo an ly, wi h he ele a ed le el o c edi isk, he banking sec o s canno main ain
sus ainable g ow h in p i a e sec o c edi s, hampe ing he iendly in es men en i onmen
o FDI p ojec s. Acco ding o he exis ing li e a u e, along wi h he bank-speci ic ac o s,
some mac oeconomic ac o s, including nega i e GDP g ow h, high in la ion and high
in e es a es, could esul in highe unemploymen and lowe le els o income, he eby
educing he bo owe s’abili y o epay he in e es and p inciples (Ani a e al., 2022). In
addi ion, he membe coun ies o he SAARC su e om c edi isk owing o he poo loan
assessmen policies, con ibu ing o ad e se selec ion o bo owe s (Bhowmik and Sa ke ,
2021). The e o e, i seems easonable o assume ha he subs an ial amoun o NPLs in he
SAARC egion could ha m he banking sec o ’s p ima y inancing ac i i y, he eby
sh inking i s abili y o ex end c edi s o he high po en ial o eign subsidia ies and
local i ms.
Fo eign in es o s a e likely o p e e domes ic inancial ma ke s o e he global ma ke in
bo owing unds o suppo hei u he g ow h in he hos coun y, he eby a oiding
exchange a e isk in case o dep ecia ing local cu ency (Bili e al., 2019). Mos ly, o eign
subsidia ies end o bo ow om comme cial banks o inance hei expo s and o he c edi
sales (Nguyen and Rugman, 2015). The exchange a e o local cu ency may be ola ile in he
sho un. In ha case, o eign subsidia ies should p e e he sou ces o he hos coun ies
o e he global heads in case o in e na ional ade inance (Nguyen and Almod
o a , 2018).
Unlike long- e m equi y in es men s in o eign subsidia ies, wo king capi al inancing seems
o be sho - e m e ms ex ending up o he c edi e ms o expo s. The e o e, o eign
subsidia ies could a oid sho - e m exchange a e isks by bo owing om he inancial
sec o s o he hos coun ies.
Since he p e ailing c edi isk could e ode he a ailabili y o ade inancing o he o eign
subsidia ies in SAARC coun ies, he s udy op s o illing up he gap by in oducing he NPL
a io, which is he p ominen measu e o c edi isk, as one o he decisi e o ces o he inwa d
FDI in lows in o he economic zone. Hence, he esea che s p edic ha he cu en s udy will
likely make h ee no el con ibu ions o he exis ing li e a u e gi en he nega i e e ec s o
p e ailing c edi isk on he a ailabili y o wo king capi al inancing. Fi s ly, he s udy would
JEFAS
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44
show how accumula ing NPLs could discou age inwa d FDI. Secondly, i has inco po a ed all
he membe coun ies o he SAARC, he eby ocusing on some coun ies, namely
A ghanis an, Bhu an and he Maldi es, which he p e ious ele an s udies should ha e
included. Thi dly, he s udy would p o ide policymake s wi h a way ou o he sus ainable
managemen o inwa d FDI wi h he a ailabili y o sho - e m ade inancing by educing
c edi isk exposu e.
The emaining po ion consis s o he ollowing sec ions: Sec ion 2 illus a es he ac ual
scena io o he c edi isk o he SAARC coun ies. In con as , Sec ion 3 demons a es he
li e a u e e iew e lec ing he ele an s udies. Sec ion 4 discusses he me hodology,
including he da a collec ion, a iables and analy ical p ocedu es. Sec ion 5 p esen s he
esul s wi h a compa ison and con as wi h he ele an p e ious s udies. Sec ion 6
ep esen s he discussion e lec ing he implica ions, sho comings and u u e esea ch
window. Finally, Sec ion 7 illus a es he conclusion sec ion wi h a summa y o he o e all
s udy and he esea ch objec i es.
2. The sho age o loanable unds in he SAARC coun ies
Figu e 2 demons a es ha he banking sec o s o he SAARC zone had been su e ing om
accumula ing a sizeable po ion o bad loans, ep esen ing he high c edi isk o he banking
indus ies o he egion o e he pe iod 2011 o 2019. Some p e ious s udies ound ha
comme cial banks in he SAARC egion we e less di e si ied in e ms o asse s and
indus ies, esul ing in an ele a ed le el o concen a ion (Mani, 2016). Hence, he egion’s
banking sec o s could be ulne able o ex e nal ad e si ies, which could enhance c edi isk.
Acco ding o Figu e 2, he median NPL a io o he eigh coun ies had been demons a ing an
up ising end, wi h he pe cen age inc easing om 4.31% in 2011 o 8.74% in 2019. On he
con a y, o he incoming FDI- o-GDP a io, he igu e shows an opposi e end, wi h he
median alue o he a io declining om 1.22% in 2011 o 0.73% in 2019.
The pe cen age o NPLs is much g ea e in he case o he SAARC membe coun ies han
ha o o he op FDI- ecei ing Asian coun ies, namely China, Singapo e and Indonesia,
whose median alues had been 1.46, 1.06 and 2.29%, espec i ely, o e he pe iod 2011 o
2019. The be e managemen o he c edi isk o hose coun ies could be a c i ical ac o in
a ac ing he MNEs o open subsidia ies he e. Mo eo e , he a ailabili y o inancial
suppo and he isk managemen skills o he banking indus ies o he economies could
p o ide o eign in es o s wi h addi ional mo i a ion o in es in hose coun ies. The highe
0
1
2
3
4
5
6
7
8
9
10
2011 2012 2013 2014 2015 2016 2017 2018 2019
in pe cen age (%)
NPL FDI in lows
Sou ce(s): Own elabo a ion
Figu e 2.
Median non-
pe o ming loan (NPL)
a io and FDI in lows
C edi isks
and FDI
45
amoun o NPLs could esul in a sho age o loanable unds o p omising business p ojec s,
which he comme cial banks could ha e ex ended in inancing he u he expansion o he
o eign subsidia ies ope a ing in he egion.
Due o he abundance o classi ied loans, comme cial banks canno issue esh c edi s o
compe ing business p ojec s. The e o e, he p e ailing poo c edi isk managemen in he
SAARC egion could be a po en ial unde lying eason, making he o eign in es o s less
mo i a ed o open subsidia ies h ough FDI in he membe coun ies.
3. Li e a u e e iew
3.1 De e minan s o FDI
Gi en he impo ance o FDI o he hos economies, he esea che s a emp ed o explo e
he ac o s inducing o eign capi al in lows. Demi han and Masca (2008) endo sed he
signi icance o openness o ade, in la ion and GDP in encou aging FDI in lows. The s udy
e ealed ha pe capi a GDP and ade lexibili y a ou ably impac FDI in lows, while
in la ion ad e sely a ec s he same. In he case o he Asia-Paci ic Economic Coope a ion
membe coun ies, Rod
ıguez (2008) ein o ced he impo ance o egional ade ag eemen s
in a ac ing FDIs in hose coun ies. To p o ide e idence om La in Ame ica, Iqbal e al.
(2016) examined en sample coun ies in he egion. The esul s o he econome ic p ocedu e
sugges ha ma ke size, ade openness and he size o he labou o ce a e a ou ably
connec ed wi h inwa d FDI. Howe e , he s udy epo ed consume p ice hikes and expo s
as insigni ican in a ac ing inwa d FDI. To e eal he ela ionship be ween ade lexibili y
and FDI in lows, Rahman and G ewal (2017) in es iga ed he membe economies o he Bay
o Bengal Ini ia i e o Mul i-Sec o al Technical and Economic Coope a ion (BIMSTEC) zone.
The s udy indica ed a signi ican causali y om impo s and expo s o FDI in lows, meaning
ha ade openness will likely impac inwa d FDI posi i ely. In a ecen analysis, Gao e al.
(2021) highligh ed ha he eal GDP g ow h a e, in la ion measu ed by Consume P ice
Index (CPI), en i onmen al quali y and ade accessibili y we e a ou ably connec ed wi h
FDI in he case o Chinese agg ega e p o incial da a.
Ano he s and o li e a u e emphasised he impo ance o he ecipien coun y’s
inancial de elopmen on incoming FDI. He mes and Lensink (2003) ou lined he impac o
economic g ow h on domes ic i ms o abso b he echnological di usion o o eign
subsidia ies. In ano he s udy, Gu u and Yada (2019) a gue ha inancial esul s a e
essen ial o acili a e he economic g ow h o B azil, Russia, India, China, Sou h A ica
(BRICS) membe economies by channelling unds in o he p oduc i e sec o s. In he case o
O ganisa ion o Economic Co-ope a ion and De elopmen (OECD) coun ies and se e al
non-OECD economies, Al a o e al. (2004) highligh ed he necessi y o a ib an inancial
sys em o suppo he highe le el o economic a ai s associa ed wi h g owing inwa d FDI.
The s udy emphasised ha a sound inancial plan could help o eign subsidia ies ope a e
e icien ly in he hos coun y. To p o ide e idence om he Chinese economy, Xu (2012)
e ealed ha FDI i ms could only wo k e icien ly i comme cial banks acili a e hem by a
conside able amoun o c edi disbu sed in he p i a e sec o . The s udy also sugges s ha
c edi s issued o inancing s a e-owned p ojec s a e nega i ely associa ed wi h China’s
economic g ow h, sugges ing he necessi y o a sound banking sec o ep esen ed by a high
ocus on he p i a e sec o ’s c edi g ow h.
Nguyen e al. (2022) ecen ly showed he alue o ex e nal unding in boos ing he
inclina ion o o eign subsidia ies o expo . Since he expo -o ien ed o eign subsidia ies
should need addi ional wo king capi al o inance he c oss-bo de ades, he a ailabili y o
sho - e m c edi s in he hos coun ies could be a loca ion-speci ic ad an age o he
subsidia ies. The s udy a gues ha he a ailabili y o bank loans, especially hose ex ended
by he hos coun ies’comme cial banks, could posi i ely in luence he subsidia ies o
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engage in expo s. In ano he e y ecen s udy, Kella d e al. (2022) e ealed he nega i e
impac o banking sec o c edi isks o bo h he in es o and ecipien coun ies on FDI
decisions in he case o Eu o A eas om 2009 o 2016. Acco ding o he s udy, MNEs may
ind i much mo e di icul o suppo he ade inancing o hei in e na ional subsidia ies
due o he c edi isk o hei home coun ies. In con as , he c edi isk o he hos coun y
could be a loca ional disad an age o o eign subsidia ies. The s udy also a gues ha
o eign subsidia ies will be less in e es ed in ope a ing in coun ies wi h high c edi isk.
Though he p e ious s udies ha e highligh ed he equi emen s o he hos coun y’s
inancial de elopmen in acili a ing he economic ac i i ies o FDI p ojec s, he cu en
s udy ound ha he impac o c edi isk on inwa d FDI needs o be mo e esea ched. The
s udy, acco ding o he esea che s, could add o he body o knowledge by demons a ing
he signi icance o c edi isk educ ion in bols e ing he pe cep ion o he in luence o
comme cial banks on FDI in lows. S udies on SAARC economies ex ensi ely ocused on
di e en mac oeconomic de e minan s o FDI, excluding he c edi isk managemen o he
banking sec o s o hose coun ies. Iqbal e al. (2018) conduc ed a s udy o highligh he
ele an ac o s a ac ing inwa d FDIs in India and S i Lanka. The esul s o he s udy
sugges ha he cu en accoun balance is posi i ely associa ed wi h inwa d FDIs in he
con ex o India. In con as , ma ke size posi i ely a ec s inwa d FDIs in S i Lanka. The
s udy also e eals ha in la ion and ade openness do no impac FDI in lows o bo h
coun ies. In ano he s udy, Rai and Sha ma (2020) con i med he causal associa ions o FDI
in lows wi h economic size, ade lexibili y and poli ical condi ion in he SAARC zone. The
s udy a gues ha expanding ma ke s, ade libe alisa ion policies and poli ical s abili y a e
decisi e ac o s in a ac ing FDI o he egion. In he con ex o Pakis an, Saleem e al. (2020)
in es iga ed he impac o some mac oeconomic ac o s, including ade openness,
ins i u ional condi ion and economic g ow h, on inbound FDI. The esul s sugges a
posi i e associa ion o he o ces wi h inbound FDI in he coun y. In ano he s udy,
Adhika y (2017) highligh ed he impo ance o ade openness and inancial sec o
de elopmen in a ac ing FDIs o se e al SAARC coun ies. In he con ex o Pakis an, Asi
and Majid (2018) in es iga ed he o ces a ec ing FDI in lows. The s udy ou lines he
implica ions o ins i u ional quali y and GDP in a ac ing inwa d FDI.
In he same economy, Uddin e al. (2019) e i ied di e en indica o s o ins i u ional o ces
on inbound FDI. The indings sugges ha egula ion posi i ely in luences inwa d FDIs.
Nayya and Mukhe jee (2019) ied in a di e en s udy o pinpoin he pe inen ex e nal and
policy-speci ic elemen s impac ing FDIs coming in o India. The au ho s ind ha bank-based
inancial sec o de elopmen and ade libe alisa ion posi i ely impac FDI. In ano he s udy,
Tahi and Alam (2022) e i ied he impo ance o economic g ow h and ade accessibili y in
a ac ing inwa d FDIs in he con ex o he SAARC zone. The s udy also con i med he
posi i e in luence o in la ion on FDI in lows in he same sample coun ies. In a e y ecen
s udy, Alam e al. (2023) ein o ced he long- un connec ion o FDI in lows wi h lexible ade
policies, economic size and in la ion a e analysing he ime se ies da a o Bangladesh.
3.2 Hypo hesis de elopmen
We ha e de eloped he ollowing es able hypo heses:
3.2.1 C edi isk and FDI.
H1. C edi isk is nega i ely associa ed wi h FDI in lows.
3.2.2 Mac oeconomic ac o s and FDI.
H2. Ma ke size posi i ely in luences FDI in lows.
H3. T ade openness posi i ely impac s FDI in lows.
C edi isks
and FDI
47
H4. Mode a e in la ion posi i ely a ac s FDI in lows.
4. Me hod
4.1 Model
We ha e designed Model 1 o show he po en ial connec ion be ween c edi isk and FDI
in lows in he p esence o con ol a iables.
FDIi ¼β0þβ1CRi þβ2MSi þβ3OPENi þβ4INFi þUi (1)
In Model 1, a ne in low o FDI is he dependen a iable. The p ima y a iable o in e es is
he c edi isk ep esen ed by he NPL a io. We cap u ed ma ke size by aking he loga i hm
o GDP, he s anda d p ac ice in he exis ing li e a u e. Simila ly, we ha e used he ade
olume- o-GDP a io o measu ing he in luence o ade on FDI in lows. Mo eo e , we used
he consume p ice index’s g ow h o quan i y he in la ion a e’s impac on FDI in lows.
4.2 Da a and a iables
This s udy seeks o asce ain how c edi isk and FDI in lows a e associa ed while con olling
o ma ke size, ade openness and in la ion. Al hough o he a iables, such as ins i u ional
quali y, in as uc u al de elopmen and poli ical s abili y, could ha e been used as he
con ol a iables, we used only he a iables ound s a is ically signi ican in mos o he
p e ious s udies. To make he model mo e economical, we did no inco po a e he a iables
ound insigni ican in he p e ious s udies. In addi ion, he excluded a iables lack uni o m
p oxy indica o s, so we did no inco po a e hem in o he s udy. In addi ion, he cu en s udy
could no include c edi isk da a o A ghanis an due o he da a una ailabili y o he
coun y. In he case o ade openness, i is conside ed unbalanced panel da a owing o he
missing obse a ions o Nepal o a ew yea s. F om 2011 o 2019, we ga he ed da a on
he eigh SAARC na ions om he Wo ld De elopmen Indica o s (WDI). We ha e p o ided a
lis o coun ies in Appendix,Table A1 and in o ma ion abou a iables in Table A2.
4.3 Analy ical p ocedu e
Se e al e icien econome ic ools a e a ailable o es ima e models on panel da a. The models
ha a e mos equen ly encoun e ed in ea lie empi ical in es iga ions a e he ixed-e ec
and andom-e ec es ima o s (Tahi and Alam, 2022;Asongu e al., 2018). The esea che s
p esume ha he o me es ima o is app op ia e o analysing da a, mainly when he
chances o se ial co ela ion be ween he dis u bance e m and independen a iables a e
high. Howe e , he p oblem wi h panel da a is ha by i s design, i canno cap u e he impac
o ime-in a ian ac o s such as dummy a iables. On he o he hand, he la e es ima o
wo ks be e in dealing wi h ime-in a ian ac o s. Howe e , i is unsui able when eg esso s
and e o e ms a e co ela ed.
Hausman (1978) pu o wa d a ool ha e icien ly p o ides he ele ancy o using ei he a
ixed- o andom-e ec es ima o o he panel da a. In he
χ
2
es ing, ejec ing he null
hypo hesis would sugges using he ixed-e ec es ima o . On he o he hand, using andom
e ec s would be ecommended, i esea che s could no deny he null hypo hesis. In ou case,
he Hausman es p o ides conside able e idence abou using he ixed-e ec model, wi h he
ejec ion o he null hypo hesis (Appendix,Table A3). Mo eo e , esul s o he edundan
es a e p o ided in Table A4,Appendix.
In he nex s ep o he analysis, we used gene alised leas squa es (GLS) o es ima ing
models. Resea che s conside he GLS-based es ima ion as an al e na i e o ixed e ec s.
They could also use he GLS es ima o o es ing he sensi i i y o he s a ic panel da a model
JEFAS
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48
(Tahi and Alam, 2022). Mo eo e , he s udy also employs he wo-s age leas squa es (TSLS)
o add ess he endogenei y p oblem. The TSLS is p e e ed o e he Gene alized Me hod o
Momen s (GMM) es ima o as he numbe o c oss sec ions is ela i ely iny. Usually, GMM
es ima ion is sui able in he case o la ge c oss sec ions and sho pe iods. Howe e , in his
s udy, ewe c oss sec ions we e used han he numbe o ime pe iods. Roodman (2009)
asse s ha he a io o ins umen s o c oss sec ions needs o be less han one. We a e unable
o employ highe o de lagged alues o he eg esso s and dependen a iables as he
ins umen s due o he minimal numbe o c oss sec ions, and hence, we could end up wi h
inadequa e ins umen s. The e o e, he s udy did no use GMM es ima ion due o insu icien
ins umen s.
5. Resul s
Resul s a e shown in Table 1 in columns 2 and 3, which p o ide indings om Pooled Leas
Squa es (PLS) and ixed-e ec analyses o he en i e sample. On he o he hand, he las wo
columns show esul s wi hou he Indian economy due o i s ela i ely la ge size han he
emaining SAARC economies. The PLS esul s indica e ha c edi isk could posi i ely and
signi ican ly in luence FDI in lows. Simila ly, economic size and ade accessibili y ha e also
accele a ed he speed o FDI in lows. Mo eo e , he in la ion a e is also posi i ely bu
insigni ican ly ela ed o FDI in lows.
In column 3, he ixed-e ec es ima o shows ha c edi isk is one o he main p oblems
he SAARC economies ace in a ac ing FDI. The coe icien o he NPLs, he p oxy o c edi
isk, is nega i e and s a is ically signi ican . The ixed-e ec indings a e consis en wi h he
GLS-based conclusion on he connec ion be ween c edi isk and FDI in lows. The unde lying
eason behind his in e se associa ion could be he ine icien alloca ion o loanable unds o
unp oduc i e p ojec s, esul ing om he poo c edi isk managemen o he coun ies’
banking sec o s. This misalloca ion o he unds could u he es ic he comme cial banks
om ex ending loans o he p oduc i e sec o s, he eby causing he c owding ou o he
in es able unds o he p omising business en u es o he o eign a ilia es.
Consequen ly, o eign subsidia ies and a ilia es will need mo e ex e nal capi al o g ow o
hei op imal le els in he domes ic ma ke . Besides, domes ic i ms p oducing he necessa y
inpu s o he MNEs canno h i e due o he ex e nal inancing c isis. The e o e, poo c edi
isk managemen could de e he po en ial FDI in lows in he egion by exe ing a de imen al
Va iables
Whole sample Wi hou India
PLS Fixed e ec s PLS Fixed e ec s
CRi; 0.065*** (0.019) 0.030** (0.015) 0.777** (0.372) 0.428** (0.209)
MSi; 1.366*** (0.058) 0.695** (0.327) 1.821*** (0.328) 0.824* (0.448)
OPENi; 2.402*** (0.271) 0.292 (0.530) 10.244*** (1.096) 0.308 (0.820)
INFLi; 0.146 (0.107) 0.118*** (0.028) 0.100 (0.306) 0.090* (0.048)
C23.911 (2.384) 4.199 (9.433) 84.732 (11.799) 21.690 (12.286)
Diagnos ics R
2
: 0.912 R
2
: 0.966 R
2
: 0.734 R
2
: 0.854
R
2
(Adj): 0.907 R
2
(Adj): 0.960 R
2
(Adj): 0.716 R
2
(Adj): 0.820
S.E.R: 0.717 S.E.R: 0.469 S.E.R:1.975 S.E.R: 0.506
F- es : 172.606 F- es : 155.536 F- es : 40.212 F- es : 25.288
P(F- es ): 0.000 P(F- es ): 0.000 P(F- es ): 0.000 P(F- es ): 0.000
No e(s): The dependen a iable is he na u al loga i hm o FDI in lows. Values in pa en heses ep esen
s anda d e o s. * ¼p<0:1;** ¼p<0:05;*** ¼p<0:01, espec i ely
Sou ce(s): Own elabo a ion
Table 1.
Reg ession esul s
C edi isks
and FDI
49
Co esponding au ho
Muhammad Tahi can be con ac ed a : [email p o ec ed]
Fo ins uc ions on how o o de ep in s o his a icle, please isi ou websi e:
www.eme aldg ouppublishing.com/licensing/ ep in s.h m
O con ac us o u he de ails: [email p o ec ed]
C oss-sec ion and andom-e ec es ing
Summa y S a is ics D.F P ob
“C oss-sec ion andom”(whole sample) 10.853 4 0.0283
“C oss-sec ion andom”(wi hou India) 8.486 4 0.0753
Sou ce(s): Au ho s’own calcula ion using E iews 10
C oss-sec ion and pe iod ixed-e ec es ing
S a is ics D.F P ob
E ec s es
“C oss-sec ion F”10.873 (7.51) 0.000
“C oss-sec ion
χ
2
”64.840 7 0.000
“Pe iod F”0.291 (8.51) 0.965
“Pe iod
χ
2
”3.177 8 0.922
Wi hou India
“C oss-sec ion F 16.397 (6,44) 0.000
“C oss-sec ion
χ
2
”73.984 6 0.000
“Pe iod F”0.758 (8,44) 0.640
“Pe iod
χ
2
”8.142 8 0.419
Sou ce(s): Au ho s’own calcula ion using E iews 10
Va iables De ini ion Sou ce
FDIi; “Fo eign di ec in es men , ne in lows (% o GDP)”WDI
CRi; “Bank non-pe o ming loans o o al g oss loans (%)”
MSi; “GDP (cons an 2010 US$)”
OPENi; “T ade (% o GDP)”
INFi; “In la ion, consume p ices (annual %)”
Sou ce(s): Own elabo a ion using da a o he Wo ld Bank
Table A3.
Hausman es
Table A4.
Redundan es
Table A2.
Va iables and da a
sou ces
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56
