Relationship between Foreign Direct Investment & Financial Market Development - Evidence from South Asian Markets
DOI:
https://doi.org/10.31384/jisrmsse/2019.17.2.4Keywords:
South Asia, Foreign direct investment, Financial market developmentAbstract
This study examines the relationship between FDI and financial market development (FMD) in the existence of other aspects, i.e., governance, social, and macroeconomic variables. The study uses the annual panel data of four emerging South Asian countries, i.e., Bangladesh, India, Pakistan, and Sri Lanka, from 1994 to 2016. Panel ARDL model is used to examine the long run and short-run relationship, while correlation and causality analysis is used to examine the relationship between FDI and FMD variables. Results show that exchange rate, governance, inflation, and real GDP growth rate are the significant predictors of FDI in South Asian countries, while FDI, education, real GDP growth rate, balance, exchange rate, and inflation are the main determinants of FMD. A positive correlation exists between FDI and FMD variables. However, bi-directional causality exists between CREDIT and FDIGDP, while no causality exists between CCB and FDIGDP; however, one-way causality exists from STKMKRTCAP and STKVOLTRA to FDIGDP. Our study suggests that countries having better governance have an edge in attracting FDI to the country. However, we have not been able to exploit the benefits, and the policymakers need to devise appropriate policies to attract FDI in South Asian countries.
Downloads
References
Adam, A. M., & Tweneboah, G. (2009). Foreign Direct Investment and Stock market Development: Ghana’s Evidence. International Research Journal of Finance and Economics, 26, 178-185.
Ahmed, S. (2008). Aggregate Economic Variables and Stock Markets in India. International Research Journal of Finance and Economics, 14, 141-164.
Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2004). FDI and economic growth:The role of local financial markets. Journal of International Economics, 64(1), 89-112. DOI: https://doi.org/10.1016/S0022-1996(03)00081-3
Ali, S., & Javaid, S. H. (2014). Foreign Financial Inflows and Stock Market of the Host Country: Empirical Evidence from Pakistan. Journal of Independent Studies & Research: Management & Social Sciences & Economics, 12(2), 77-89. DOI: https://doi.org/10.31384/jisrmsse/2014.12.2.6
Batuo, M., Mlambo, K., & Asongu, S. (2018). Linkages between financial development, financial instability, financial liberalization, and economic growth in Africa. Research in International Business and Finance, 45, 168-179. DOI: https://doi.org/10.1016/j.ribaf.2017.07.148
Bekaert, G., Harvey, C. R. & Lundblad, C. (2005). Does Financial Liberalization SpurGrowth? Journal of Financial Economics, 77(1), 3-55 DOI: https://doi.org/10.1016/j.jfineco.2004.05.007
Bekhet, H. A., & Al-Samadi, R. W. (2015). Determinants of Jordanian Foreign Direct Investment inflows: Bounds testing approach. Economic Modelling, 46, 27-35. DOI: https://doi.org/10.1016/j.econmod.2014.12.027
Borensztein, E., Gregorio, D. J., & Lee, J. W. (1998). How does foreign direct investmentaffect economic growth? Journal of International Economics, 45(1), 115–135 DOI: https://doi.org/10.1016/S0022-1996(97)00033-0
Culem, C. G. (1988). The locational determinants of direct investments among industrialized countries. European Economic Review, 32(4), 885-904. DOI: https://doi.org/10.1016/0014-2921(88)90051-7
Dunning, J. H. (1988). Explaining International Production. Unwin Hyman Ltd., London
Dunning, J. H. (1993). Multinational Enterprises and the Global Economy. Reading: Addison-Wesley.
Dutta, N., & Roy, S. (2011). Foreign Direct Investment, Financial Development, and Political Risks. The Journal of Developing Areas, 44(2), 303-327. DOI: https://doi.org/10.1353/jda.0.0106
Globerman, S., & Shapiro, D. M. (1999). The Impact of Government Policies on Foreign Direct Investment: The Canadian Experience. Journal of International Business Studies, 30(3), 513-532. DOI: https://doi.org/10.1057/palgrave.jibs.8490081
Greenwood, J., & Jovanovic, B. (1990). Financial Development, Growth, and the Distribution of Income. Journal of Political Economy, 98(5), 1076-1107. DOI: https://doi.org/10.1086/261720
Hermes, N., & Lensink, R. (2003). Foreign Direct Investment, Financial Development and Economic Growth. Journal of Development Studies, 40(1), 142-163. DOI: https://doi.org/10.1080/00220380412331293707
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2009). Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008. World Bank Policy Research Working Paper No. 4978. DOI: https://doi.org/10.1596/1813-9450-4978
Kholdy, S., & Sohrabian, A. (2008). Foreign Direct Investment, Financial Markets, and political corruption. Journal of Economic Studies, 35(6), 486-500. DOI: https://doi.org/10.1108/01443580810916514
Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688-726.
Loree, D. W., & Guisinger, S. E. (1995). Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment. Journal of International Business, 26(2), 281-299. DOI: https://doi.org/10.1057/palgrave.jibs.8490174
Madsen, J. B., Islam, M. R., & Doucouliagos, H. (2018). Inequality, financial development, and economic growth in the OECD, 1870–2011. European Economic Review, 101, 605-624. DOI: https://doi.org/10.1016/j.euroecorev.2017.11.004
Mahmood, H., & Alkhateeb, T. T. Y. (2018). Foreign Direct Investment, Domestic Investment, and Oil Price Nexus in Saudi Arabia. International Journal of Energy Economics and Policy, 8(4), 147-151.
Ouyang, Y., & Li, P. (2018). On the nexus of financial development, economic growth, and energy consumption in China: New perspective from a GMM panel VAR approach. Energy Economics, 71, 238-252. DOI: https://doi.org/10.1016/j.eneco.2018.02.015
Park, D., & Shin, K. (2017). Economic Growth, Financial Development, and Income Inequality. Emerging Markets Finance and Trade, 53(12), 2794-2825. DOI: https://doi.org/10.1080/1540496X.2017.1333958
Pesaran, M. H., & Shin, R. (1995). Estimating long-run relationships in dynamic heterogeneous panels. Journal of Econometrics, 68(1), 79-113. DOI: https://doi.org/10.1016/0304-4076(94)01644-F
Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94(4), 621-634. DOI: https://doi.org/10.1080/01621459.1999.10474156
Samad, A., & Akhtarruzaman, M. (2014). FDI, Financial development and economic growth: evidence of causality from East and South East Asian countries. Global Business and Economics Review, 16(2), 202-213. DOI: https://doi.org/10.1504/GBER.2014.060186
Schneider, F., & Frey, B. S. (1985). Economic and political determinants of foreign direct investment. World Development, 13(2), 161-175. DOI: https://doi.org/10.1016/0305-750X(85)90002-6
Shahbaz, M., Hoang, T. H., Mahalik, M. K., & Roubaud, D. (2017). Energy consumption, financial development, and economic growth in India: New evidence from a nonlinear and asymmetric analysis. Energy Economics, 63, 199-212. DOI: https://doi.org/10.1016/j.eneco.2017.01.023
Shen, C. H., & Lee, C. H. (2006). Same Financial Development Yet Different Economic Growth: Why? Journal of Money, Credit and Banking, 38(7), 1907-1944. DOI: https://doi.org/10.1353/mcb.2006.0095
Soumare, I., & Tchana, F. T. (2015). Causality between FDI and Financial Market Development: Evidence from Emerging Markets. World Bank Economic Review, 29(1), 205-216. DOI: https://doi.org/10.1093/wber/lhv015
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2019 Author
This work is licensed under a Creative Commons Attribution 4.0 International License.
Copyright: The Authors