The Role of Financial Markets in Economic Growth (original) (raw)
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FDI and economic growth: the role of local financial markets
Journal of International …, 2004
The purpose of this paper is to examine the various links among foreign direct investment, financial markets and growth. We model an economy with a continuum of agents indexed by their level of ability. Agents have two choices: they can work for the foreign company in the FDI sector and use their wealth to earn a return or they can choose to undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents in the economy to take advantage of knowledge spillovers from FDI.
Foreign Direct Investment and Financial markets The role of financial development on growth
In this paper, we analyze the link between FDI and financial market development on economic growth. We focused on whether countries with more developed financial markets are able to exploit FDI more proficiently. Several indicators relating to the working of a country's financial market have been used. Our estimations are based on an unbalanced and a balanced dataset, covering the period 1985 to 2008. We find no significant direct impact of FDI on economic growth. Also, our results indicate that while the combined impact of FDI and financial market on growth is not significant, stock markets trigger economic growth. Our results are robust across both datasets; even after controlling for other factors affecting economic growth.
Foreign direct investment, financial development and economic growth
The Journal of Development Studies, 2003
2 This paper argues that the development of the financial system of the recipient country is an important precondition for FDI to have a positive impact on economic growth. A more developed financial system positively contributes to the process of technological diffusion associated with FDI. The paper empirically investigates the role the development of the financial system plays in enhancing the positive relationship between FDI and economic growth. The empirical investigation presented in the paper strongly suggests that this is the case. Of the 67 countries in data set, 37 have a sufficiently developed financial system in order to let FDI contribute positively to economic growth. Most of these countries are in Latin America and Asia.
Attaining economic growth through financial development and foreign direct investment
Journal of Economic Studies, 2019
Purpose-The purpose of this paper is to consider the heterogeneous relationship among financial development, foreign direct investment (FDI) and economic growth, examining the possible directions of causality among them in both the short and long runs. Design/methodology/approach-A sample of the G-20 countries over the period 1970-2016 is utilized. A vector error-correction model is used to consider the possible directions of causality among financial development, FDI and economic growth. Findings-Results suggest a cointegrating relationship among the three series. Although short-run links among the variables are mostly non-uniform, both financial development and FDI matter in the determination of long-run economic growth. Practical implications-Attention must be paid to policies that promote financial development. This, in turn, calls for fostering incentives to guarantee continued support to liberalize the economy and promoting capital openness. Additionally, financial infrastructure should be improved to improve financial innovation. The establishment of a well-developed financial market, including well-functioning banks and other financial institutions, can facilitate further investment and an easier means of raising capital to support the activities of FDI. Economic growth can ultimately be elevated through both financial development and FDI. Originality/value-The study considers a sample of the G-20 countries, which have received relatively little attention in the existing literature. In addition, the study concurrently analyses the trivariate causal relationship among financial development, FDI and economic growth, a topic on which there has been a dearth of research.
Achieving economic growth through financial development and foreign direct Investment
Abdinasir Ali , 2022
The purpose of this study is to investigate the possibilities in which economic growth is affected by the interacting impacts of financial development and foreign direct investment (FDI) in a selected country. A panel dynamic data of selected 102 countries from 1981 to 2020 were employed. A combination of the Random effect Model, Fixed effect model, Pooled OLS Model,
2006
The empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained entrepreneurs to start their own firms. The increase in the number of varieties of intermediate goods leads to positive spillovers to the final goods sector. As a result financial markets allow the backward linkages between foreign and domestic firms to turn into FDI spillovers. Our calibration exercises indicate that a) holding the extent of foreign presence constant, financially well-developed economies experience growth rates that are almost twice those of economies with poor financial markets, b) increases in the share of FDI or the relative productivity of the foreign firm leads to higher additional growth in financially developed economies compared to those observed in financially under-developed ones, and c) other local conditions such as market structure and human capital are also important for the effect of FDI on economic growth. JEL Classification: F23, F36, F43, O40
Does foreign direct investment promote growth? Exploring the role of financial markets on linkages
Journal of Development Economics, 2010
Do multinational companies generate positive externalities for the host country? The evidence so far is mixed varying from beneficial to detrimental effects of FDI on growth, with many studies that find no effect. In order to provide an explanation for this empirical ambiguity, we formalize a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages. Using realistic parameter values, we quantify the response of growth to FDI and show that an increase in the share of FDI leads to higher additional growth in financially developed economies relative to financially under-developed ones.
Foreign Direct Investment, Financial Development and Economic Growth in Key Emerging Markets
Journal of Economics and Allied Research, 2020
This research paper investigates the impact of foreign direct investment on economic growth in key emerging markets contingent on the role of financial development using fixed effects and random effects models. The data set analysed stretches from 1990 to 2018 on twenty-four emerging markets. The empirical results reveal that foreign direct investment is a major driver of growth in the emerging markets as the coefficient of FDI is positively and significantly related to economic growth in emerging markets. The empirical results further show that financial development and an interaction term between FDI and financial development have negative influence on growth in the emerging markets. The paper recommends that efforts be made to formulate and implement friendly investment policies in the emerging markets to attract high inflows of FDI. The paper further recommends that governments in the emerging markets should strive to formulate and implement financial development policies capable of promoting economic growth.
Foreign Direct Investment, Financial Development and Economic Growth: A Panel Data Analysis
Jurnal pengurusan, 2017
This study investigates the effects of financial development in enabling foreign direct investment to promote economic growth. A sample of 65 developing countries is examined over the period of 2009 to 2015 with the dynamic panel estimation by using Generalized Method of Moment (GMM). Financial development is measured using three financial indicators and an index of financial development is constructed based on the following indicators: domestic credit to private sector, liquid liabilities and private credit by banks. The results demonstrate that the financial development index contributes positively and higher than each financial development proxy in influencing the effects of FDI on economic growth. However, FDI influence negative effect in the group of countries of low level of financial development. Thus, it suggests that financial development need to be increased and serves as a form of absorptive capacity that enable the positive growth effects of FDI in the recipient countries.