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Financial development and the growth effect of foreign direct investment: Does one size fit all?

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  • Osei, Michael J.
  • Kim, Jaebeom

Abstract

This paper examines the relationship between financial development and the growth effect of foreign direct investment in a panel of 75 countries between 1990 and 2019 using a regression-based club convergence test and linear and nonlinear specifications. Our regression analysis suggests that financial development emerges as a significant determinant of the composition of convergence clubs, albeit differently for the nexus between foreign direct investment and growth in each club. The results also point to the presence of heterogeneity and threshold effect in the relationship between foreign direct investment and growth, reflecting both the “kick-in” and “vanishing” effects of financial development. Thus, at lower levels of financial development, pursuing policies aimed at improving local financial sector conditions in tandem with policies aimed at attracting more foreign direct investment can help host economies maximize the benefits of foreign direct investment. However, policymakers can expect these benefits to eventually decline as the economy becomes more financially developed.

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  • Osei, Michael J. & Kim, Jaebeom, 2023. "Financial development and the growth effect of foreign direct investment: Does one size fit all?," International Economics, Elsevier, vol. 173(C), pages 276-283.
    • Handle: RePEc:eee:inteco:v:173:y:2023:i:c:p:276-283
    DOI: 10.1016/j.inteco.2023.01.001
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    More about this item

    Keywords

    Foreign direct investment; Financial development; Economic growth; Convergence clubs; Dynamic panel threshold model;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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