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Financial Openness and Growth in Developing Countries: Why Does the Type of External Financing Matter?

Author

Listed:
  • Gaies, Brahim

    (IPAG Lab - IPAG Business School, France)

  • Nabi2, Mahmoud-Sami

    (LEGI-Tunisia Polytechnic School, Tunisia, FSEG Nabeul, University of Carthage, Tunisia)

Abstract

This study examines how external financing (EF) affects growth in developing countries by distinguishing between two forms of external financing: debt and foreign direct investment (FDI). We show that both types favor growth by boosting investment through the credit channel. However, excessive external debt increases vulnerability to financial crises. Contrariwise, FDI plays an amortizing role by reducing a crisis’ effects. The empirical evidence confirms these results and demonstrates that, despite the more secure nature of FDI, mixed financing (debt and FDI) remains more profitable for developing countries because of the inverted U-shaped growth effect of the FDI-to-debt ratio. Moreover, exchange rate stability decreases vulnerability to financial crises, whereas higher stability turns into exchange rate rigidity and thus increases crisis occurrence.

Suggested Citation

  • Gaies, Brahim & Nabi2, Mahmoud-Sami, 2019. "Financial Openness and Growth in Developing Countries: Why Does the Type of External Financing Matter?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 34(3), pages 426-464.
    • Handle: RePEc:ris:integr:0777
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    Citations

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    Cited by:

    1. Ben-Salha Ousama & Zmami Mourad, 2020. "The impact of private capital flows on economic growth in the MENA region," Economics and Business Review, Sciendo, vol. 6(3), pages 45-67, August.
    2. Gaies, Brahim & Goutte, Stéphane & Guesmi, Khaled, 2020. "Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates," Research in International Business and Finance, Elsevier, vol. 52(C).

    More about this item

    Keywords

    External debt; FDI; Financial crisis; Exchange rate rigidity;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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