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Financial Development and Foreign Direct Investment—The Moderating Role of Quality Institutions

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  • Mollah Aminul Islam

    (School of Economics, Huazhong University of Science and Technology, Luoyu Road 1037, Wuhan 430074, Hubei, China
    Department of Accounting & Information Systems, Jatiya Kabi Kazi Nazrul Islam University, Namapara 2220, Bangladesh)

  • Muhammad Asif Khan

    (Department of Commerce, Faculty of Management Sciences, University of Kotli, Azad Jammu and Kashmir, Kotli 11100, Pakistan)

  • József Popp

    (Faculty of Economics and Social Sciences, Szent István University, 2100 Gödölő, Hungary
    TRADE Research Entity, Faculty of Economic and Management Sciences, North–West University, Vanderbijlpark 1900, South Africa)

  • Wlodzimierz Sroka

    (Management Department, WSB University, Zygmunta Cieplaka 1c, 41-300 Dąbrowa Gornicza, Poland
    North–West University, Hoffman Street, Potchefstroom 2351, South Africa)

  • Judit Oláh

    (TRADE Research Entity, Faculty of Economic and Management Sciences, North–West University, Vanderbijlpark 1900, South Africa
    Faculty of Economics and Business, Institute of Applied Informatics and Logistics, University of Debrecen, 4032 Debrecen, Hungary)

Abstract

Considering the importance of foreign direct investment (FDI) inflows for the sustainable economic advancement of a host country, this paper investigates the financial development and FDI nexus, using institutional quality as a moderator. The sample consists of 79 Belt and Road Initiative (BRI) partner countries, as these countries are entering a new age of integration, foreign trade, and mutual development. The empirical findings of conventional and robust estimators show that the financial development of BRI host countries significantly attracts FDI, while the institutional quality plays a significant moderating role in this relation. The in-depth analysis offers the insight that financial markets are less attractive to FDI relative to financial institutions. Thus, policymakers are advised to uphold sound financial institutions to make the country more attractive to overseas investors, while concentration on financial markets may multiply the benefits of FDI. The results are robust to alternative proxies of the key variables and alternative methodologies.

Suggested Citation

  • Mollah Aminul Islam & Muhammad Asif Khan & József Popp & Wlodzimierz Sroka & Judit Oláh, 2020. "Financial Development and Foreign Direct Investment—The Moderating Role of Quality Institutions," Sustainability, MDPI, vol. 12(9), pages 1-22, April.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:9:p:3556-:d:350980
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    12. 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.
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