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Causality between FDI and Financial Market Development: Evidence from Emerging Markets

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  • Soumaré, Issouf
  • TCHANA TCHANA, Fulbert

Abstract

This paper studies the causal relationship between foreign direct investment (FDI) and financial market development (FMD) using panel data from emerging markets. Most studies of the relationship between FDI and FMD have focused on the role of FMD in the link between FDI and economic growth, with no deep understanding of direct causality between FDI and FMD, especially in emerging markets, where financial markets are in the development stage. We document bidirectional causality between FDI and stock market development indicators. For banking sector development indicators, the relationship is ambiguous and inconclusive. Care is therefore needed when analysing the relationship between FMD and FDI, as results may depend on whether the FMD variables used to evaluate causality are stock market or banking sector development indicators.

Suggested Citation

  • Soumaré, Issouf & TCHANA TCHANA, Fulbert, 2011. "Causality between FDI and Financial Market Development: Evidence from Emerging Markets," MPRA Paper 31328, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:31328
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    More about this item

    Keywords

    Foreign direct investment; FDI; financial market development; stock market development; banking sector development; causality;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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