The Impact of Financial Sector Development on Foreign Direct Investment: An Empirical Study on Minimum Threshold Levels

  • Kunofiwa Tsaurai University of South Africa, Department of Finance, Risk Management and Banking
  • Daniel Makina University of South Africa, Department of Finance, Risk Management and Banking
DOI: https://doi.org/10.22610/jebs.v10i5(J).2513
Keywords: Foreign Direct Investment; Financial Sector Development; Endogeneity; Threshold; Emerging Markets

Abstract

Using panel data of 21 emerging economies, the paper investigates the financial sector development threshold levels that would influence foreign direct investment (FDI) inflows. The threshold levels we identified are 41.27% of stock market capitalization for stock market turnover, 53.55% of gross domestic product (GDP) for stock market value traded, 121.53% of GDP for stock market capitalization, 114.43% of GDP for domestic credit to private sector by banks, 144.06% of GDP for domestic credit provided by financial sector, 0.22% of GDP for outstanding domestic private debt securities and 41.26% of GDP for outstanding domestic public debt securities. Our results show that higher stock market and banking sector development above the threshold level positively and significantly influence FDI inflows whilst the influence of lower stock market and banking sector development on FDI inflows was weak and not significant. Levels of private bond market development equal to or greater than the threshold level are found to have a positive but non-significant impact on FDI inflows whilst private bond market development levels less than the threshold have a weaker positive and non-significant influence on FDI inflows. On the other hand, public bond market development levels equal to or greater than the threshold level negatively influenced FDI inflows whilst levels of public bond market development less than the threshold positively but non-significantly attracted FDI inflows into emerging markets.  

Downloads

Download data is not yet available.

References

Agbloyor, E. K., Abor, J. Y., Adjasi, C. K. D. & Yawson, A. (2014). Private capital flows and economic growth in Africa: The role of domestic financial markets. Journal of International Financial Markets, Institutions & Money, 30, 137-152. Aliber, R. Z. (1970). A theory of direct foreign investment. The International Corporation, Cambridge, 17-34. Asong, S. A. (2014). Linkages between investment flows and financial development. African Journal of Economic and Management Studies, 5(3), 269-299. Azman-Saini, W. N. W., Law, S. H. & Ahmad, A. H. (2010). FDI and economic growth: New evidence on the role of financial markets. Economic Letters, 107(2), 211-213. Balasubramanyam, V. N., Salisu, M. & Sapsford, D. (1996). Foreign direct investment and growth in EP and IS countries. The Economic Journal, 106(1), 92-105. Bartels, F. L., Alladina, S. N. & Lederer, S. (2009). Foreign direct investment in Sub-Saharan Africa: Motivating factors and policy issues. Journal of African Business, 10(2), 141-162. Bick, A. (2010). Threshold effects of inflation on economic growth in developing countries. Economic Letters, 108(2), 126-129. Biglaiser, G. & DeRouen, K. (2006). Economic reforms and inflows of foreign direct investment in Latin America. Latin American Research Review, 41(1), 51-75. Caner, M. & Hansen, B. E. (2004). Instrumental variable estimation of a threshold model. Economic Theory, 20 (5), 813-843. Choong, C. K. (2012). Does domestic financial development enhance the linkages between foreign direct investment and economic growth? Empirical Economics, 42(3), 819-834. Claessens, S. & Laeven, L. (2003). Financial development, property rights and growth. The Journal of Finance, 8(6), 2401-2435.
Craigwell, M. F. A. W. R. (2012). Economic growth, foreign direct investment and corruption in developed and developing countries. Journal of Economic Studies, 39(6), 639-652. Denisia, V. (2010). Foreign direct investment theories: An overview of the main FDI theories. European Journal of Interdisciplinary Studies, 2(2), 104-110. Dunning, J. H. (1977). Trade location of economic activity and the MNE: A search of an eclectic approach, in B. Ohlin, P.O. Hesselborn and P.J. Wijkman, The international allocation of economic activity. Macmillan, London. Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. Journal of International Business Studies, 11(1), 9-31. Dutta, N. & Roy, S. (2011). Foreign direct investment, financial development and political risks. The Journal of Developing Areas, 44(2), 303-327. Ezeoha, A. E. & Cattaneo, N. (2012). FDI flows to Sub-Saharan Africa: The impact of finance, institution and natural resource endowment. Comparative Economic Studies, 54(3), 597-632. Hailu, Z. A. (2010). Demand side factors affecting the inflow of foreign direct investment to African countries: Does capital market matter? International Journal of Business and Management, 5(5), 103-112. Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing and inference. Journal of Econometrics, 93(2), 345-368. Havranek, T. & Irsova, Z. (2011). Estimating vertical spill overs from FDI: Why results vary and what the true effect is. Journal of International Economics, 85(2), 234-244. Hermes, N. & Lensink, R. (2003). Foreign direct investment, financial development and economic growth. Journal of Development Studies, 40(1), 142-163. Huang, H. & Xu, C. (1999). Institutions, innovations and growth. American Economic Review, 89(2), 438-443. IMF. (2015). World Economic Outlook: Adjusting to Lower Commodity Prices. Washington (October). Jorgenson, D. W. (1963). Capital theory and investment behaviour. The American Economic Review, 53(2), 247-259. Kang, S. J. & Lee, H. S. (2007). The determinants of location choice of South Korean FDI in China. Japan and the World Economy, 19(4), 441-460. Kaur, M., Yadav, S. S. & Gautam, V. (2013). Financial system development and foreign direct investment: A panel study for BRICS countries. Global Business Review, 14(4), 729-742. Kremer, S., Bick, A. & Nautz, D. (2013). Inflation and growth: New evidence from a dynamic pane Threshold analysis. Empirical Economics, 44(2), 861-878. Levine, R. (1997a). Financial development and economic growth: Views and Agenda. Journal of Economic Literature, 35(2), 688-726. Levine, R. (1997b). Stock markets, economic development and capital control liberalisation. Perspectives, 3(5), 1-7. Lopez-Carlos, A. & Schwab, K. (2007). The Arab World Competitiveness Report 2007, World Economic Forum, Palgrave MacMillan, London. Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42. Mastromarco, C. & Ghosh, S. (2009). Foreign capital, human capital and efficiency: A stochastic frontier analysis for developing countries, World Development, 37(2), 489-502. Matemilola, B. T., Bany-Ariffin, A. N., Azman-Saini, W. N. W. & Nassir, A. M. (2016). Non-linearity in debt and return relationship: Evidence from dynamic panel threshold method, Journal of Applied Sciences, 16(9), 438-444. Nnandi, M. & Soobaroyen, T. (2015). International financial reporting standards and foreign direct investment: The case of Africa. Advances in accounting, 31(2), 228-238. Omran, M. & Bolbol, A. (2003). Foreign direct investment, financial development and economic growth: Evidence from the Arab countries. Review of Middle East Economics and Finance, 1(3), 231-249. Romer, P. (1986). Increasing returns and long run economic growth. Journal of Political Economy, 94(5), 1002-1037. Roodman, D. A. (2009). Note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71 (1), 135-158. Sayek, S. (2009). Foreign direct investment inflation. Southern Economic Journal, 76(2), 419-443. Sghaier, I. M. & Abida, Z. (2013). Foreign direct investment, financial development and economic growth: Empirical evidence from North African countries. Journal International and Global Economic Studies, 6(1), 1-13.
Soumare, I. & Tchana, F. T. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, 29 (Supplement 1), 1-12. Tan, A. & Ismail, N. W. (2015). Foreign direct investment, sovereign debt and growth: Evidence for the Euro Area, American Journal of Trade and Policy, 2 (1), 51-58. UNCTAD. (2012). WorldInvestmentReport2012. New York: United Nations Vita, G. & Kyaw, K. (2009). Growth effects of FDI and portfolio investment flows to developing countries: A disaggregated analysis by income levels, Applied economics letters, 16(3), 277-283. Walsh, J. P. & Yu, J. (2010). Determinants of FDI: A sectoral and institutional approach, 187, 1-27. Wang, H. & Xie, X. (2009). On effects of foreign direct investment on economic growth. International business research journal, 2(4), 100-108.
Published
2018-11-03
How to Cite
Tsaurai, K., & Makina, D. (2018). The Impact of Financial Sector Development on Foreign Direct Investment: An Empirical Study on Minimum Threshold Levels. Journal of Economics and Behavioral Studies, 10(5(J), 244-254. https://doi.org/10.22610/jebs.v10i5(J).2513
Issue
Vol 10 No 5(J) (2018)
Section
Research Paper

Copyright (c) 2018 Kunofiwa Tsaurai, Daniel Makina

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of a revised paper in the light of suggestions of the reviewers, editorial team edits and formats manuscripts to bring uniformity and standardization in published material.

This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.