Foreign Direct Investment, Economic Growth, and Financial Sector Development: A Comparative Analysis

Abstract

In this study, patterns of foreign direct investment (FDI) and economic growth are investigated among select developed and East Asian countries. In particular, it aims to investigate the development of the domestic financial sector in transferring the technological diffusion embodied in FDI inflows to the chosen countries. It is evident in all the countries under study that both FDI and economic growth are not cointegrated by themselves directly, but rather through their dynamic interaction with the development of the domestic financial sector. Our results prove that the presence of FDI inflows creates a positive technological diffusion in the long run only if the evolution of the domestic financial system has achieved a certain minimum level. From the short-run causality models, the striking similarity in the behaviour of FDI on economic growth across countries suggests the possibility of common financial sector development in different countries, despite differences in their fiscal policy, industrial development, and other domestic determinants.

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