Stock Market Development, Institutional Quality and Foreign Direct Investment nexus in Pakistan

Abstract

Stocks Markets Development (SMD) and Foreign Direct Investment (FDI) play an important role to promote economic growth in any country. The aim of the study is to investigate the relationship between SMD, FDI and Institutional Quality (IQ) in case of Pakistan. The study used different macroeconomic variables and Institutional factors like, SMD and FDI as dependent variables in two different econometric models, and Portfolio Investment (PFI), Exchange Rate (ExR), Inflation Rate (IR) and Domestic Credit to Private Sector (DCPS) as independent variables. Other factors include, Government Effectiveness (GE), Rule of Law (RoL), Control of Corruption (CoC) and Political Stability (PS). Annual Data is analyzed  from 1996 to 2021 by applying Ordinary Least Square (OLS) Method. Results concluded that, SMD positively impacted by PFI, FDI and ExR and Institutional Factors including GE and RoL also positive impacted on SMD. While other Institutional Factors including CoC and PL put negative impact on SMD. IR also negatively impacted on SMD. In the second regression, FDI is positively impacted by SMD, DCPS, and IR and negatively impacted by ExR in case of Pakistan.  Institutional Factors including GE, RoL and CoC also positively impacted on SMD and only PS negatively impacted on FDI. The study also applied CUSUM and CUSUM Square test for Stability purposes.