Foreign direct investments and financial development: empirical evidence from developed and developing countries

Abstract

This article aims to explore the relationship between foreign direct investments and the financial development in both, developed and developing countries. The relevance of financial development (FD) on foreign direct investments (FDI) is explored in three panels. The first overall panel contains 93 economies; the second contains 32 developed economies, while the third panel contains 61 developing economies over the period 2002-2015. A Granger causality test that implements a vector autoregressive (VAR) framework within the panel setting is employed. Besides this, panel regression model is estimated. In order to test the sensitivity of the results and avoid robust errors, we employ a panel ARDL model. The findings of ARDL model indicate that there is a long-run relationship between FD and FDI for both developed and developing countries as well as for the overall sample. A short-run relationship is reported for the overall sample of countries as well as for developed countries. The estimation of panel regression model indicates a significant positive impact of domestic credit to private sector (% GDP) on FDI in overall sample.Granger causality test indicates a bidirectional relationship between financial development and foreign direct investments in overall sample as well as in developing countries. A unidirectional relationship running from financial development toforeign direct investmentsis reported for developed countries