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

Author

Listed:
  • Adil H. Suliman
  • Mohammad I. Elian

    (Gulf University for Science and Technology (GUST), Kuwait)

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 countriesÕ 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.

Suggested Citation

  • Adil H. Suliman & Mohammad I. Elian, 2014. "Foreign direct investment, financial development, and economic growth: a cointegration model," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(3), pages 219-243, July-Sept.
    • Handle: RePEc:jda:journl:vol.48:year:2014:issue3:pp:219-243
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    Citations

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    Cited by:

    1. Huy Tiet Pham & Christopher Gan & Baiding Hu, 2022. "Causality between Financial Development and Foreign Direct Investment in Asian Developing Countries," JRFM, MDPI, vol. 15(5), pages 1-26, April.
    2. Dzingai Francis Chapfuwa & Peter Baur, 2020. "Institutions, Foreign Direct Investment (Fdi) And Economic Growth: Does The Existence Of Strategic Natural Resources Matter?," Review of Socio - Economic Perspectives 202061, Reviewsep.
    3. Elya Nabila Abdul Bahri & Abu Hassan Shaari Md Nor & Tamat Sarmidi & Nor Hakimah Haji Mohd Nor, 2019. "The Role of Financial Development in the Relationship Between Foreign Direct Investment and Economic Growth: A Nonlinear Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-32, June.
    4. Muhammad Tahir & Khizar Hayat & Nisar Ahmad, 2018. "Investigating the Influence of Financial Development Indicators on Economic Growth: Evidence from South Asia," Accounting and Finance Research, Sciedu Press, vol. 7(3), pages 1-9, August.
    5. Ha, Le Thanh, 2022. "Effects of digitalization on financialization: Empirical evidence from European countries," Technology in Society, Elsevier, vol. 68(C).
    6. Ngo, Thanh & Trinh, Hai Hong & Haouas, Ilham & Ullah, Subhan, 2022. "Examining the bidirectional nexus between financial development and green growth: International evidence through the roles of human capital and education expenditure," Resources Policy, Elsevier, vol. 79(C).

    More about this item

    Keywords

    Foreign Direct Investment; Financial Development; Economic Growth; Cointegration; Granger Causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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