Do credit risks deter FDI? Empirical evidence from the SAARC countries


  • Md Badrul Alam Jahangirnagar University, Savar, Bangladesh
  • Muhammad Tahir COMSATS University Islamabad, Abbottabad Campus, Abbottabad, Pakistan
  • Norulazidah Omar Ali Universiti Brunei Darussalam, Gadong, Brunei Darussalam


FDI, Credit risk, Banking sector, SAARC



This paper makes a novel attempt to estimate the potential impact of credit risk on foreign direct investment (FDI hereafter), thereby focusing on a completely unexplored area in the existing empirical literature.


To provide a comprehensive understanding of the relationship between credit risk and FDI inflows, the study incorporates all the eight-member economies of the South Asian Association of Regional Cooperation (SAARC hereafter) and analyzes a panel data set, over the period 2011 to 2019, extracted from the World Development Indicators, using the suitable econometric techniques for the efficient estimations of the specified models.


The results indicate a negative and statistically significant relationship between the credit risk of the banking sectors and FDI inflows. Similarly, market size and inflation rate appear to be the two other main factors behind the increasing FDI inflows in the SAARC member economies. Interestingly, the size of the market became irrelevant in attracting FDI inflows when the Indian economy is excluded from the sample due to its higher economic weight. On the other hand, FDI inflows are not dependent on the level of trade openness, with most of the specifications showing either an insignificant or negative coefficient of the variable.

Practical implications

The obtained results are unique and robust to alternative methodologies, and hence, the SAARC economies could consider them as the critical inputs in formulating the appropriate policies on FDI inflows.


The findings are unique and original. The authors have established a relationship between credit risk and FDI for the first time in the SAARC context.



Download data is not yet available.


Adhikary, B.K. (2017), “Factors influencing foreign direct investment in South Asian economies: a comparative analysis”, South Asian Journal of Business Studies, Vol. 6 No. 1, pp. 8-37.

Aggarwal, R. and Kyaw, N.A. (2008), “Internal capital networks as a source of MNC competitive advantage: evidence from foreign subsidiary capital structure decisions”, Research in International Business and Finance, Vol. 22 No. 3, pp. 409-439.

Alam, M.B., Sayal, A.U., Naveed Jan, M. and Tahir, M. (2023), “Banking sector performance and FDI inflows in Bangladesh: exploring the unexplored”, Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print, doi: 10.1108/JEAS-08-2022-0193.

Alfaro, L., Chanda, A., Kalemli-Ozcan, S. and Sayek, S. (2004), “FDI and economic growth: the role of local financial markets”, Journal of International Economics, Vol. 64 No. 1, pp. 89-112.

Anita, S.S., Tasnova, N. and Nawar, N. (2022), “Are non-performing loans sensitive to macroeconomic determinants? Empirical evidence from banking sector of SAARC countries”, Future Business Journal, Vol. 8 No. 1, pp. 1-16.

Arif, A., Sadiq, M., Shabbir, M.S., Yahya, G., Zamir, A. and Bares Lopez, L. (2020), “The role of globalisation in financial development, trade openness and sustainable environmental-economic growth: evidence from selected South Asian economies”, Journal of Sustainable Finance and Investment, Vol. 12 No. 4, pp. 1027-1044.

Asiamah, M., Ofori, D. and Afful, J. (2019), “Analysis of the determinants of foreign direct investment in Ghana”, Journal of Asian Business and Economic Studies, Vol. 26 No. 1, pp. 56-75, doi: 10.1108/JABES-08-2018-0057.

Asif, M. and Majid, A. (2018), “Institutional quality, natural resources and FDI: empirical evidence from Pakistan”, Eurasian Business Review, Vol. 8 No. 4, pp. 391-407.

Asongu, S., Akpan, U.S. and Isihak, S.R. (2018), “Determinants of foreign direct investment in fast-growing economies: evidence from the BRICS and MINT countries”, Financial Innovation, Vol. 4 No. 1, p. 26.

Berger, A.N., Hasan, I. and Zhou, M. (2010), “The effects of focus versus diversification on bank performance: evidence from Chinese banks”, Journal of Banking and Finance, Vol. 34 No. 7, pp. 1417-1435.

Bhowmik, P.K. and Sarker, N. (2021), “Loan growth and bank risk: empirical evidence from SAARC countries”, Heliyon, Vol. 7 No. 5, e07036.

Bilir, L.K., Chor, D. and Manova, K. (2019), “Host-country financial development and multinational activity”, European Economic Review, Vol. 115, pp. 192-220.

Dao, T.B.T. and Ngo, V.D. (2022), “Does foreign direct investment stimulate the output growth of the formal economic sector in Vietnam: a subnational-level analysis”, International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print, doi: 10.1108/IJOEM-09-2021-1506.

Demirhan, E. and Masca, M. (2008), “Determinants of foreign direct investment flows to developing countries: a cross-sectional analysis”, Prague Economic Papers, Vol. 4 No. 4, pp. 356-369.

Foley, C.F. and Manova, K. (2015), “International trade, multinational activity, and corporate finance”, Economics, Vol. 7 No. 1, pp. 119-146.

Gao, R., De Vita, G., Luo, Y. and Begley, J. (2021), “Determinants of FDI in producer services: evidence from Chinese aggregate and sub-sectoral data”, Journal of Economic Studies, Vol. 48 No. 4, pp. 869-892, doi: 10.1108/JES-07-2020-0355.

Guru, B.K. and Yadav, I.S. (2019), “Financial development and economic growth: panel evidence from BRICS”, Journal of Economics Finance and Administrative Science, Vol. 24 No. 47, pp. 113-126.

Hanifah, M. (2016), “Pengaruh Pembiayaan Berdasarkan Jenis Akad Terhadap Non Performing Financing Bank Pembiayaan Rakyat Syariah Di Indonesia”, Skripsi Institut Pertanian Bogor.

Hausman, J.A. (1978), “Specification tests in econometrics”, Econometrica: Journal of the Econometric Society, Vol. 46 No. 6, pp. 1251-1271, doi: 10.2307/1913827.

Hermes, N. and Lensink, R. (2003), “Foreign direct investment, financial development and economic growth”, The Journal of Development Studies, Vol. 40 No. 1, pp. 142-163.

Iqbal, B.A., Rahman, M.N. and Hassan, M. (2016), “MNCs and their role and contribution in Latin American countries”, Transnational Corporations Review, Vol. 8 No. 2, pp. 151-164.

Iqbal, B.A., Rahman, M.N. and Yusuf, N. (2018), “Determinants of FDI in India and Sri Lanka”, Foreign Trade Review, Vol. 53 No. 2, pp. 116-123.

Iqbal, B.A., Rahman, M.N. and Sami, S. (2019), “Impact of belt and road initiative on Asian economies”, Global Journal of Emerging Market Economies, Vol. 11 No. 3, pp. 260-277.

Isaev, M. and Masih, M. (2017), “Macroeconomic and bank-specific determinants of different categories of non-performing financing in Islamic banks: evidence from Malaysia”, MPRA Paper (79719), University Library of Munich, Germany, available at:

Jena, N.R. and Sethi, N. (2021), “Foreign capital and growth nexus revisited: empirical evidence from South Asian countries”, Transnational Corporations Review, Vol. 13 No. 3, pp. 269-292.

Kellard, N.M., Kontonikas, A., Lamla, M.J., Maiani, S. and Wood, G. (2022), “Risk, financial stability and FDI”, Journal of International Money and Finance, Vol. 120, 102232.

Mahmood, N., Shakil, M.H., Akinlaso, I.M. and Tasnia, M. (2019), “Foreign direct investment and institutional stability: who drives whom?”, Journal of Economics, Finance and Administrative Science, Vol. 24 No. 47, pp. 145-156, doi: 10.1108/JEFAS-05-2018-0048.

Mani, M. (2016), “Financial inclusion in South Asia—relative standing, challenges and initiatives”, South Asian Survey, Vol. 23 No. 2, pp. 158-179.

Nayyar, R. and Mukherjee, J. (2019), “Home country impact on Outward FDI from India”, Journal of Policy Modeling, Vol. 42 No. 2, pp. 385-400.

Nguyen, Q.T. and Almodóvar, P. (2018), “Export intensity of foreign subsidiaries of multinational enterprises: the role of trade finance availability”, International Business Review, Vol. 27 No. 1, pp. 231-245.

Nguyen, Q.T. and Rugman, A.M. (2015), “Multinational subsidiary sales and performance in Southeast Asia”, International Business Review, Vol. 24 No. 1, pp. 115-123.

Nguyen, A.T., Anwar, S., Alexander, W.R.J. and Lu, S.H. (2022), “Openness to trade, foreign direct investment, and economic growth in Vietnam”, Applied Economics, Vol. 54 No. 29, pp. 3373-3391.

Priyadi, U., Utami, K.D.S., Muhammad, R. and Nugraheni, P. (2021), “Determinants of the credit risk of Indonesian Sharīʿah rural banks”, ISRA International Journal of Islamic Finance, Vol. 13 No. 3, pp. 284-301, doi: 10.1108/IJIF-09-2019-0134.

Rahman, M.N. (2016), “Role of WTO in promoting merchandise trade of BRICS”, Transnational Corporations Review, Vol. 8 No. 2, pp. 138-150.

Rahman, M.N. and Grewal, H.S. (2017), “Foreign direct investment and international trade in BIMSTEC: panel causality analysis”, Transnational Corporations Review, Vol. 9 No. 2, pp. 112-121.

Rai, S.K. and Sharma, A.K. (2020), “Causal nexus between FDI inflows and its determinants in SAARC countries”, South Asia Economic Journal, Vol. 21 No. 2, pp. 193-215.

Rathnayaka Mudiyanselage, M.M., Epuran, G. and Tescașiu, B. (2021), “Causal links between trade openness and foreign direct investment in Romania”, Journal of Risk and Financial Management, Vol. 14 No. 3, p. 90.

Rodríguez, C. (2008), “Developing economies and the Asia-Pacific economic cooperation forum-APEC: intrabloc trade and attraction of foreign direct investment from the region”, Journal of Economics, Finance and Administrative Science, Vol. 13 No. 24, pp. 81-112.

Roodman, D. (2009), “How to do xtabond2: an introduction to difference and system GMM in Stata”, The Stata Journal, Vol. 9 No. 1, pp. 86-136.

Saleem, H., Shabbir, M.S. and Bilal Khan, M. (2020), “The short-run and long-run dynamics among FDI, trade openness and economic growth: using a bootstrap ARDL test for co-integration in selected South Asian countries”, South Asian Journal of Business Studies, Vol. 9 No. 2, pp. 279-295.

Shah, M.H. and Khan, Y. (2016), “Trade liberalisation and FDI inflows in emerging economies”, Business and Economic Review, Vol. 8 No. 1, pp. 35-52.

Shahbaz, M., Mateev, M., Abosedra, S., Nasir, M.A. and Jiao, Z. (2021), “Determinants of FDI in France: role of transport infrastructure, education, financial development and energy consumption”, International Journal of Finance and Economics, Vol. 26 No. 1, pp. 1351-1374.

Tahir, M. and Alam, M.B. (2022), “Does well banking performance attract FDI? Empirical evidence from the SAARC economies”, International Journal of Emerging Markets, Vol. 17 No. 2, pp. 413-432, doi: 10.1108/IJOEM-04-2020-0441.

Uddin, M., Chowdhury, A., Zafar, S., Shafique, S. and Liu, J. (2019), “Institutional determinants of inward FDI: evidence from Pakistan”, International Business Review, Vol. 28 No. 2, pp. 344-358.

Xu, Y. (2012), “How does financial system efficiency affect the growth impact of FDI in China? Evidence from provincial data 1999‐2006”, China Finance Review International, Vol. 2 No. 4, pp. 406-428, doi: 10.1108/20441391211252166.




How to Cite

Alam, M. B., Tahir, M., & Ali, N. O. (2024). Do credit risks deter FDI? Empirical evidence from the SAARC countries. Journal of Economics, Finance and Administrative Science, 29(57), 42–56. Retrieved from

Similar Articles

1 2 > >> 

You may also start an advanced similarity search for this article.