Foreign direct investment and inclusive finance: do financial markets and quality of institutions matter?

Joshua Yindenaba Abor (), Richard Dwumfour, Elikplimi Komla Agbloyor () and Lei Pan ()
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Joshua Yindenaba Abor: University of Ghana
Elikplimi Komla Agbloyor: University of Ghana
Lei Pan: Curtin University

Empirical Economics, 2024, vol. 67, issue 2, No 13, 773-815

Abstract: Abstract We examine the impact of foreign direct investment (FDI) on financial inclusion. To identify the causal effect of FDI on financial inclusion, we use plausibly exogenous source of variations in bilateral investment treaties (BITs) as a novel instrumental variable (IV) for net FDI inflows. Using annual data for a broad panel of 90 countries over the period 2004 to 2017, our results show that FDI improves financial inclusion for both “access to finance" and “use of financial services". This impact is more pronounced for relatively poor countries and developing countries compared to rich and developed countries. We also find that higher financial market development and quality institutions improve financial inclusion directly. Moreover, financial market development and institutional quality can serve as potential channels and moderating variables through which FDI affects financial inclusion. Our results are robust to various estimations and sample splitting and have important implications for policy on financial inclusion.

Keywords: FDI; Financial inclusion; Financial market development; Institutional quality; Bilateral investment treaties (search for similar items in EconPapers)
JEL-codes: E44 F21 G21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-024-02567-2

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