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The purpose of this paper is to empirically examine the effects of financial liberalization and trade openness on the economic growth of two countries, namely, Pakistan and India for the period 1985-2014.

This study uses the autoregressive distributed lag technique, which allows mixed order of integration. In addition, it uses the principal component method to create an index for financial liberalization to examine how it affects the economic growth of the selected countries.

The findings reveal that in the short and long run, trade openness has positive effect on the Pakistan’s economic growth while the financial liberalization has positive impact only in the long run. In the case of India, both financial liberalization and trade openness positively and significantly influence the economic growth in the short and long run.

By comparing the results of both countries, trade openness and financial liberalization increase the economic growth of India more than that of Pakistan. These results suggest that Pakistan should consider appropriate positive policies regarding financial liberalization and trade openness to achieve high and stable economic growth in the future.

This study creates financial liberalization index by using the principal component analysis method to explain the role of financial liberalization in the economic growth of Pakistan and India. In addition, it makes comparison of the results based on which country benefits most from the liberalization of trade and financial sectors. Only very few studies have examined these countries, yet their results have remained inconclusive as well.

This study examines the long-term and causal relationship among foreign direct investment (FDI) inflows, trade openness and economic growth from India.

This study has used annual time series data from the period 1985–2018 and applied the Johansen cointegration and vector autoregression (VAR) model.

The results of Johansen's cointegration confirm no long-term relationship among all the above three variables. Further, the results of VAR Granger causality indicate that FDI causes economic growth and economic growth causes FDI, which confirms the bi-directional causality. In contrast, this study found that there is no bi-directional causality between trade openness and economic growth.

Through this study, the government could take the decisions related to foreign investment after adopting more trade openness because the study results revealed that if India follows more trade openness, then how FDI will flow (upward and downward). With impulse analysis, researchers, government and policymakers take the decision-related FDI inflows for the forthcoming ten years after 2018.

This study has found the most exciting results from the impulse functions of FDI inflows, trade openness and economic growth, which showed the situation of these three variables as increase and decrease in the forthcoming ten years.