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Foreign direct investment and economic growth: Is more financial development better?

Michael Osei () and Jaebeom Kim

Economic Modelling, 2020, vol. 93, issue C, 154-161

Abstract: We investigate the extent to which an increase in financial development affects the positive effect of foreign direct investment on economic growth. Although the financial sector is beneficial for economic growth, the effect of further financial development on growth is found to become insignificant. Using a dynamic panel threshold model on 62 middle- and high-income countries spanning the period 1987–2016, we re-examine the possible nonlinearity between finance, foreign direct investment, and growth. Consistent with the “vanishing effect” of financial development, we find significant evidence that foreign direct investment fosters growth in general, but the growth effect of foreign direct investment becomes negligible when the ratio of private sector credit to gross domestic product exceeds 95.6%. This finding is robust to different econometric methods, various subsamples and interaction analyses, and distinct financial development indicators.

Keywords: Foreign direct investment; Financial development; Economic growth; Generalized method of moments; Dynamic panel threshold model (search for similar items in EconPapers)
JEL-codes: C33 F23 F36 F43 G10 O16 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.07.009

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