The effects of financial development on foreign direct investment

Rodolphe Desbordes and Shang-Jin Wei

Journal of Development Economics, 2017, vol. 127, issue C, 153-168

Abstract: This paper empirically investigates the various effects that source and destination countries’ financial development (SFD and DFD respectively) have on foreign direct investment (FDI). We establish causality by exploiting variations in both country-specific financial development and sector-specific financial vulnerability. This approach is made possible by our use of detailed databases on real manufacturing FDI projects worldwide. We find that both SFD and DFD have a large positive influence on greenfield, expansion, and mergers & acquisitions FDI, by directly increasing access to external finance and indirectly promoting manufacturing activity. The overall economic impacts of SFD and DFD tend to be similar but their direct and indirect effects vary across margins and types of FDI.

Keywords: Financial constraints; Financial development; Foreign direct investment; Greenfield; Mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: F23 O16 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (122)

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Working Paper: The Effects of Financial Development on Foreign Direct Investment (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:127:y:2017:i:c:p:153-168

DOI: 10.1016/j.jdeveco.2017.02.008

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