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FDI, financial development, and economic growth: International evidence

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Abstract

Previous studies have recognized that the benefits from foreign direct investment (FDI) to recipient countries can only be realized when those countries have reached a certain level of financial development. However, the dynamic interrelationships among FDI, financial development, and real output, including the long-run equilibrium as well as causality, have not been analyzed. This paper overcomes this major shortcoming by applying recent advances in panel cointegration and panel error correction models for a set of 37 countries using annual data for the period 1970-2002. For the first time, we explore the directions of causality among FDI, financial development, and economic growth and obtain solid, convincing evidence of a fairly strong long-run relationship. Furthermore, the financial development indicators have a larger effect on economic growth than does FDI. From the panel causality tests, while the evidence of a short-run relationship is weak, that of a long-run relationship among the variables is unequivocal. Overall, the findings underscore the potential gains associated with FDI when coupled with financial development in an increasingly global economy.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): XII (2009)
Issue (Month): (November)
Pages: 249-271

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Handle: RePEc:cem:jaecon:v:12:y:2009:n:2:p:249-271

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Keywords: foreign direct investment; financial development; economic growth; panel cointegration; panel causality;

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Cited by:
  1. Agbloyor, Elikplimi Komla & Abor, Joshua & Adjasi, Charles Komla Delali & Yawson, Alfred, 2013. "Exploring the causality links between financial markets and foreign direct investment in Africa," Research in International Business and Finance, Elsevier, Elsevier, vol. 28(C), pages 118-134.
  2. Temiz, Dilek & Gökmen, Aytaç, 2014. "FDI inflow as an international business operation by MNCs and economic growth: An empirical study on Turkey," International Business Review, Elsevier, Elsevier, vol. 23(1), pages 145-154.
  3. Asongu Simplice, 2012. "Linkages between Investment Flows and Financial Development: Causality Evidence from Selected African Countries," Working Papers, African Governance and Development Institute. 12/029, African Governance and Development Institute..
  4. Chun-Ping Chang & Chien-Chiang Lee & Meng-Chi Hsieh, 2011. "Globalization, Real Output and Multiple Structural Breaks," Global Economic Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 40(4), pages 421-444, December.
  5. Omri, Anis & Kahouli, Bassem, 2014. "Causal relationships between energy consumption, foreign direct investment and economic growth: Fresh evidence from dynamic simultaneous-equations models," Energy Policy, Elsevier, Elsevier, vol. 67(C), pages 913-922.
  6. Mina, Wasseem Michel, 2012. "The Institutional Reforms Debate and FDI Flows to the MENA Region: The “Best” Ensemble," World Development, Elsevier, Elsevier, vol. 40(9), pages 1798-1809.
  7. Yusuf Ekrem Akbas & Mehmet Senturk & Canan Sancar, 2013. "Testing for Causality between the Foreign Direct Investment, Current Account Deficit, GDP and Total Credit: Evidence from G7," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(6), pages 791-812, December.

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