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

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Date: Summer 2014
From: Journal of Developing Areas(Vol. 48, Issue 3)
Publisher: Tennessee State University
Document Type: Article
Length: 10,704 words
Lexile Measure: 1640L

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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 countries' 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. JEL Classifications: C32; F43; O16, O53 Keywords: Foreign Direct Investment, Financial Development, Economic Growth, Cointegration, Granger Causality

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Gale Document Number: GALE|A416596380