Monday, December 9, 9:00am
Matthew Morrison
Dr. Muhammad Nawaz
Financial development is becoming an increasingly important area of emphasis as we shift toward an ever-globalizing economy. Better financial institutions and financial market structure encourage investors to invest outside of their home countries. Additionally, investors have certain expectations when investing, and unless they are willing to take risks, they are unlikely to invest directly in countries with poor financial infrastructure. This study identifies financial development and its subcategories—financial institutions and financial markets—as key pathways for the attraction and retention of FDI. Using the Financial Development Index, this research further contributes and dissects financial development in depth, access, and efficiency to understand the different impacts that financial markets and institutions have on FDI. We employ fixed-effect and random-effect models using the panel data for 72 countries from 1995 to 2022 and find out the impact of financial development and other financial variables on FDI. Our regression results confirm a statistically significant positive effect of overall financial development on FDI. The robustness analysis using the subcategories of financial development such as financial markets and financial institutions also confirms the significant impact on FDI. We further explore other dimensions of financial developments including depth, efficiency, and access which reveal mostly positive impacts, although market efficiency shows a slight negative effect. Countries with well-developed financial systems—both in markets and institutions—are better positioned to attract and retain FDI.
Keywords: Financial Development, Financial Market, Foreign Direct Investment (FDI), Panel Data Analysis
JEL Classification: F21, F23, O16, O43