Do Finance and Investment Drive Employment? Empirical Evidence from Asian Countries

Abstract

Employment generation continues to be a major concern for many Asian economies, where high economic growth has not consistently resulted in adequate job creation. Factors such as financial sector development and foreign direct investment (FDI) play an important role in shaping labor market outcomes by enhancing access to capital, improving productivity, and promoting industrial expansion. However, the impact of these factors differs across countries and time periods. This study contributes to the literature by applying the Pooled Mean Group (PMG) Autoregressive Distributed Lag (ARDL) model to simultaneously analyze both short-run and long-run dynamics between financial development, FDI, economic growth, and employment, offering comparative insights that remain underexplored. The study focuses on four Asian economies—Bangladesh, India, Pakistan, and Sri Lanka—covering the period from 1990 to 2022. It empirically examines the interrelationships among financial development, FDI inflows, economic growth, and employment rates. The PMG ARDL approach is employed to capture long-term equilibrium relationships as well as short-term adjustments, while unit root tests account for mixed levels of stationarity among variables. The empirical findings indicate that, in the long run, financial development, FDI inflows, and economic growth positively influence employment levels. However, in the short run, financial development and FDI exhibit a negative effect on employment, whereas economic growth continues to have a positive impact. To validate these results, robustness checks using Fully Modified OLS (FMOLS) and Dynamic OLS (DOLS) were conducted, confirming the consistency of the estimated relationships. These findings offer important policy implications for addressing unemployment challenges in Asian economies.