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FDI, financial development, and economic growth: International evidence

Chien-Chiang Lee () and Chun-Ping Chang ()

Journal of Applied Economics, 2009, vol. 12, 249-271

Abstract: Previous studies have recognized that the benefits from foreign direct investment (FDI) to recipient countries can only be realized when those countries have reached a certain level of financial development. However, the dynamic interrelationships among FDI, financial development, and real output, including the long-run equilibrium as well as causality, have not been analyzed. This paper overcomes this major shortcoming by applying recent advances in panel cointegration and panel error correction models for a set of 37 countries using annual data for the period 1970-2002. For the first time, we explore the directions of causality among FDI, financial development, and economic growth and obtain solid, convincing evidence of a fairly strong long-run relationship. Furthermore, the financial development indicators have a larger effect on economic growth than does FDI. From the panel causality tests, while the evidence of a short-run relationship is weak, that of a long-run relationship among the variables is unequivocal. Overall, the findings underscore the potential gains associated with FDI when coupled with financial development in an increasingly global economy.

Keywords: foreign direct investment; financial development; economic growth; panel cointegration; panel causality : (search for similar items in EconPapers)
JEL-codes: F23 O16 O40 (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:cem:jaecon:v:12:y:2009:n:2:p:249-271