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Does financial deepening attract foreign direct investment? Fresh evidence from panel threshold analysis

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  • Liu, Haiyun
  • Islam, Mollah Aminul
  • Khan, Muhammad Asif
  • Hossain, Md Ismail
  • Pervaiz, Khansa

Abstract

This study investigates the nexus between financial deepening (FD) and foreign direct investment (FDI) in the context of a heterogeneous panel of One Belt One Road partner countries, using a relatively new FD index proposed by the International Monetary Fund. The study also adds value to the literature by exploring the nonlinearity with a panel threshold model. The study finds that FD has a significant and positive impact on attracting foreign investments. However, panel threshold regression finds that countries with FD below a threshold of 0.1803 are less attractive to foreign investors. This finding implies that to maximize the benefits of FDI, economies in the region will have to deepen their financial sector above this threshold. Interestingly, the financial system of emerging markets and low-income countries in the sample significantly and positively affects FDI, but this relation disappears among advanced markets. Overall, the findings are robust to alternative estimators, addressing endogeneity, cross-sectional dependence, heteroscedasticity, and serial correlation.

Suggested Citation

  • Liu, Haiyun & Islam, Mollah Aminul & Khan, Muhammad Asif & Hossain, Md Ismail & Pervaiz, Khansa, 2020. "Does financial deepening attract foreign direct investment? Fresh evidence from panel threshold analysis," Research in International Business and Finance, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:riibaf:v:53:y:2020:i:c:s0275531919300406
    DOI: 10.1016/j.ribaf.2020.101198
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    More about this item

    Keywords

    Financial deepening; FDI; OBOR; Endogeneity; 2SLS; Panel threshold model;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages

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