Financial development and the growth effect of foreign direct investment: Does one size fit all?

Michael Osei and Jaebeom Kim

International Economics, 2023, vol. 173, issue C, 276-283

Abstract: This paper examines the relationship between financial development and the growth effect of foreign direct investment in a panel of 75 countries between 1990 and 2019 using a regression-based club convergence test and linear and nonlinear specifications. Our regression analysis suggests that financial development emerges as a significant determinant of the composition of convergence clubs, albeit differently for the nexus between foreign direct investment and growth in each club. The results also point to the presence of heterogeneity and threshold effect in the relationship between foreign direct investment and growth, reflecting both the “kick-in” and “vanishing” effects of financial development. Thus, at lower levels of financial development, pursuing policies aimed at improving local financial sector conditions in tandem with policies aimed at attracting more foreign direct investment can help host economies maximize the benefits of foreign direct investment. However, policymakers can expect these benefits to eventually decline as the economy becomes more financially developed.

Keywords: Foreign direct investment; Financial development; Economic growth; Convergence clubs; 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: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:173:y:2023:i:c:p:276-283

DOI: 10.1016/j.inteco.2023.01.001

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