IDEAS home Printed from https://ideas.repec.org/a/jda/journl/vol.48year2014issue3pp219-243.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://muse.jhu.edu/journals/journal_of_developing_areas/v048/48.3.suliman.html
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. 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.
    3. Ha, Le Thanh, 2022. "Effects of digitalization on financialization: Empirical evidence from European countries," Technology in Society, Elsevier, vol. 68(C).
    4. 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.
    5. 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.
    6. Shoukat Iqbal Khattak & Waseem Ahmad Khan, 2024. "Chinese Overseas Foreign Direct Investment–International Foreign Portfolio Investment–Financial Sector Development Nexus in the Belt and Road Initiative Economies: A Regional Analysis Based on Third-G," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(1), pages 3014-3038, March.
    7. 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jda:journl:vol.48:year:2014:issue3:pp:219-243. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Abu N.M. Wahid (email available below). General contact details of provider: https://edirc.repec.org/data/cbtnsus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.