Effect of Sukuk Market Development on Foreign Direct Investment in Sukuk-Issuing Countries

The rapid expansion of the global sukuk market and the increasing need to attract foreign direct investment (FDI) have raised an important question regarding whether Islamic capital market development can strengthen a country's investment attractiveness. This study investigates the effect of sukuk market development on FDI inflows in sukuk-issuing countries while controlling for GDP per capita, inflation, and trade openness. The analysis employs the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) estimator using quarterly panel data from nine sukuk-issuing countries covering the period 2015–2024. Prior to estimation, cross-sectional dependence, slope heterogeneity, second-generation unit root, and Westerlund–Edgerton cointegration tests were conducted, followed by a robustness analysis using the Augmented Mean Group (AMG) estimator. The results reveal that sukuk market development exerts a positive and statistically significant effect on FDI inflows in both the short and long run. The negative and significant Error Correction Term confirms the existence of a stable long-run equilibrium relationship. In addition, GDP per capita and trade openness positively influence FDI inflows, whereas inflation has a negative effect. The AMG estimates further confirm the robustness of the findings. These results demonstrate that strengthening the sukuk market enhances a country's attractiveness to foreign investors by improving the depth and credibility of the Islamic financial system. The study provides empirical evidence supporting the strategic role of sukuk market development in promoting sustainable investment and offers policy implications for regulators seeking to strengthen Islamic capital markets as a source of long-term development financing