Effect of financial sector development and FDI inflow on employment rate in South Asia: New empirical evidence from ARDL approach

Abstract

The current analysis aims to explore the empirical nexus between financial development, foreign direct investment (FDI) inflow, and employment rate. To attain this aim, we collect 30 years of annual data over the period 1990 to 2019 from South Asian economies and employ the autoregressive dynamic least square (ARDL) model for regression analysis. The implication of the ARDL model was subject to the mixed stationarity status of the series as assessed by unit root testing. The robustness of the analysis was checked by employing the fully modified ordinary least square (FMOLS) and dynamic ordinary least square (DOLS) models. The statistical analysis infers that both financial development and FDI inflow enhance the employment rate in the South Asia region. In addition, the empirical analysis infers that the gross capital formation, economic growth, and export volume have a positive while the population growth rate has a negative effect on the employment rate. The impact of underlying explanatory variables was found significant only in long run. The estimated coefficient values in the case of FMOLS and DOLS models support the direction of the relationship between explanatory variables and employment rate, implying the robustness of the analysis. The findings of the current analysis can be used to devise efficient economic policies to cope with the encroaching issue of unemployment in the South Asia region. This study offers the robustness to existing literature and complements the literature by exploring the underlying arrangement of study to the whole South Asia group.