Financing Start-ups in SAARC Nations: The Role of FDI, Domestic Credit Access, and Bank Expansion

Research background: Existing literature suggests that access to funds is one major hurdle for new businesses and startups. Although many sources seem to provide funds to them, the question is, are they really contributing? Are these sources effectively and actively funding new businesses and startups? Hence, knowing the effective sources will help policymakers and regulators support young entrepreneurs. Purpose of the article: The present study explores the impact of three critical factors-domestic credit to the private sector, commercial bank branches, and foreign direct investment (FDI)-on new business registrations and startups and assesses their contribution to the growth of young entrepreneurship within the context of SAARC (South Asian Association for Regional Cooperation) nations. Methods: The study analyzed data from the World Bank covering eight SAARC nations for 44 years (1980-2023). The study analyses the relationship between the indicators. A cross-sectional dependence test was then performed using Pesaran's, revealing significant dependence among the SAARC countries. To ensure robustness, a panel unit root test (CADF) was conducted to check for stationarity, confirming that all variables are stationary at first difference. The Johansen cointegration test was applied to validate the long-term relationships between the variables. Finally, the study used FMOLS (Fully Modified Ordinary Least Squares) and DOLS (Dynamic Ordinary Least Squares) methods to assess the long-term effects of the variables on new business registrations and startups, with results indicating significant correlations. Findings & Value added: This study reveals that all variables significantly influence new business registration in the SAARC nations, except domestic credit to the private sector (DCPVT) in the case of DOLS. Commercial bank branches have a statistically significant effect on new business and startup registrations. This suggests that established businesses might have greater access to credit than new entrants. FDI, however, was found to be statistically significant but needs further investigation. This study contributes to the existing literature on what is more relevant and effective in financing startups and emphasizes the importance of targeting funding specifically to new businesses and startups. The study suggests that SAARC nations need more effective policies for allocating and monitoring domestic credit to ensure the development of new businesses and startups.