To read the full version of this content please select one of the options below:

Does financial development matter for domestic investment? Empirical evidence from India

Niharika Sinha (Economics, Banasthali Vidyapith, Jaipur, India)
Swati Shastri (Economics, Banasthali Vidyapith, Jaipur, India)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 23 June 2021

97

Abstract

Purpose

This paper empirically examines the impact of financial development on domestic investment in India for the period 1989–2017.

Design/methodology/approach

This study employs the autoregressive distributed lag (ARDL) bounds testing approach to co-integration to test the long-run relationship between financial development and domestic investment. To test the direction of causality, Toda–Yamamoto causality test and vector error correction model (VECM) Granger causality/Block Exogeneity Wald test have been employed. Investment has been measured by Gross Capital Formation. To capture various aspects of financial development in India, eight alternative indicators (both bank based and market based) have been used. With the help selected indicators, a composite index (FINDEX) of financial development has been constructed using principal component analysis (PCA).

Findings

The estimated result finds evidence in favour of positive, short-run and long-run impact of financial development on investment in the Indian economy. Both bank-based and market-based indicators are found to significantly affect the level of investment. The significant effect of efficiency-based financial development indicators (both bank based and market based) upon domestic investment implies that there is a need to implement policies that ensure the efficiency of financial intermediation.

Originality/value

To the best of authors' knowledge, not much research has been done to explore the relationship between financial development and domestic investment, especially in the case of Indian economy. This study also tries to find the impact of bank-based and market-based financial development indicators upon domestic investment to explore banks vs market issue.

Keywords

Acknowledgements

Declaration of conflicting interests: The authors declare that there is no conflict of interest

Citation

Sinha, N. and Shastri, S. (2021), "Does financial development matter for domestic investment? Empirical evidence from India", South Asian Journal of Business Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SAJBS-09-2020-0332

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

Related articles