Foreign direct investment, financial development, and economic growth: a cointegration model

Adil H. Suliman and Mohammad I. Elian ()
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Mohammad I. Elian: Gulf University for Science and Technology (GUST), Kuwait

Journal of Developing Areas, 2014, vol. 48, issue 3, 219-243

Abstract: This paper examines causalities among foreign direct investment (FDI), economic growth (GTH), and financial development proxied by both equity market size (EQM) and bank credit to private sectors (BANK). We use a structural cointegration model with a vector error correction (VEC) mechanism to test for the short-term dynamics of the model. The results show that there is a reinforcing causal relationship between FDI and EQM, and between EQM and GTH in the short term, and that these variables cointegrate in the long term. As far as practical implications are concerned, the results reinforce that developed financial markets are an essential precondition for the positive impact of FDI on economic growth, reflecting host countriesÕ ability to exploit FDI more efficiently. Moreover, the paper provides further substance for the notion that a country with a well-developed financial market gains significantly from FDI inflow.

Keywords: Foreign Direct Investment; Financial Development; Economic Growth; Cointegration; Granger Causality (search for similar items in EconPapers)
JEL-codes: C32 F43 O16 O53 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.48:year:2014:issue3:pp:219-243

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