The effect of FDI through local financial market on the economic growth

Abstract

This paper examines how financial development will facilitate FDI in order to promote economic growth. This is, the better-developed financial markets economies are able to benefit more from FDI to accelerate economic growth. This study applies regression analysis to quantitatively measure how the response of growth to FDI varies with the level of development of the financial markets over 1980-2004 periods. This paper uses OECD countries and NON-OECD countries and NON-OECD countries to represent the well and poor functioning financial market, respectively. From the regression results, we can conclude that the different structure of economic development and financial development leads to different ways in order to promote the economic growth. For the OECD countries, which financial markets are well-functioning, comparing with the NON-OECD countries, the financial market development in both banking sector and capital market can stimulate economic growth. Moreover, higher value of market capitalization (CAP) accelerates economic growth by attracting FDI inflows. For the NON-OECD countries, the financial market development and the interaction between financial market and FDI do not have any effect on economic growth. However, one-period lagged FDI plays a major role for accelerating economic growth. Therefore, in order to accelerate the economic growth, the policy maker should investigate whether a country is an OECD country or a NON-OECD country, and apply the appropriate policy. That is, if the country is an OEDC country, the policy maker should pursue the financial market development policy in order to accelerate the economic growth. Conversely, if the country is a NON-OECD country, the policy maker should pursue attracting FDI policy in order to accelerate the economic growth.