FDI inflow and financial channels: international evidence before and after crises

Selma Izadi, Mamunur Rashid and Parviz Izadi

Journal of Financial Economic Policy, 2021, vol. 14, issue 1, 24-42

Abstract: Purpose - Extending on the resource-seeking foreign direct investment (FDI) hypothesis, this paper aims to uncover the potential relationship between financial and non-financial channels and inward FDI before and after the global financial crisis. Design/methodology/approach - The sample includes 561 year-country observations on 33 developed and developing countries during 2001 and 2017. This study investigates several determinants such as inflation, gross domestic product growth, exchange rate, trade openness, financial openness, Sharpe ratio and country market capitalization, using ordinary least squares, fixed effects and system generalized method of moments. Findings - The results indicate a negative relationship between inflation and financial openness with FDI inflow while market capitalization and exchange rate were positively connected to FDI inflow. All three financial channels of FDI inflow: financial market size, financial openness and Sharpe ratio significantly influenced FDI inflow. Moreover, inflation, financial openness and Sharpe ratio imply a meaningful impact on the FDI inflow of developed and developing countries, with a relatively stronger influence during the post-crisis periods. Asymmetric impact tests also revealed similar results. Research limitations/implications - These findings offer an impression that financial market development channels may significantly boost FDIs in developing and, as well as developed countries. With special reference to the developing countries, a disciplined financial market and financial openness may help attract more FDIs. Originality/value - Impact of the financial crisis on FDI inflows while observing the impact of the financing channels in developing and developed countries is rare in the academic domain. This study forwards that a structured and open financial market may help in recovering from the financial crisis.

Keywords: Inward FDI; Financial crisis; System GMM; Developing countries; Developed countries; Financial markets; Investment decisions (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-04-2020-0091

DOI: 10.1108/JFEP-04-2020-0091

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