The aim of this exploratory research is to examine the foreign direct investment (FDI) – financial development (FD) nexus and to analyse the strength of relationships among FDI measures. The study employed structural equation modelling (SEM) on selected data from the World Development Indicators (WDI) from 1979 to 2016 to achieve the modest goal of this paper. The study established that FDI inflows are precursors of a vibrant and well-developed financial institution in emerging economies. We also found positive and negative correlations amongst the FDI measures, which suggest they move pari passu in stimulating the FD of an economy. A notable feature of this study is in the employment of SEM empirical strategy to shed light on the FDI-FI nexus. The study concluded that emerging economies must focus on the creation of a congenial investment climate to attract FDI inflows, which pivots robust financial institutions because of their cascading effects on the overall economy.
If the inline PDF is not rendering correctly, you can download the PDF file here.
1. Adam, A. M. and Tweneboah, G. (2009), “foreign direct investment and stock market development: Ghana’s Evidence”, International Research Journal of Finance and Economics, Vol. 26 No. 1, pp. 178-185.
2. Adeniyi, O., Omisakin, O, Egwaikhide, F.O., and Oyinlola, A. (2012), “Foreign direct investment, economic growth and financial sector development in small open developing economies”, Economic Analysis & Policy, Vol. 42 No.1, pp. 105 – 127.
3. Al Nasser, O. M. and Soydemir, G (2010), “Domestic and international determinants of foreign direct investment in Latin America”, FMA Annual Meeting, New York, USA.
4. Alfaro, L., Chanda, A., Kalemli-Ozcan, S., Sayek, S. (2004), “FDI and economic growth: The role of local financial markets”, Journal of International Economics, Vol. 64 No. 1, pp. 113-134.
5. Ali-Nakyea, A. and Amoh, J.K. (2018), “Have the generous tax incentives in the natural resource sector been commensurate with FDI Flows? A critical analysis from an emerging economy”, International Journal of Critical Accounting, Vol. 10 No. 3/4, pp. 257–273. Available from https:// doi: 10.1504/IJCA.2018.093064
6. Akpan, U.S., Isihaka S.R., and Asongub, S. A. (2014), “Determinants of foreign direct investment in fast-growing economies: A study of BRICS and MINT African governance and development”, Institute Research Department, AGDI Working Paper.
7. Akhtar, M. H, Sheikh, M. R, and Altaf, A. (2016), “Financial development, energy consumption and trade openness nexus: Empirical evidence from selected South Asian countries”, Pakistan Journal of Social Sciences (PJSS), Vol. 36 No. 1, pp. 505-518.
8. Anderson, B.B. (2015), „Corrupting activities and economic development”, World Journal of Entrepreneurship, Management and Sustainable Development, Vol. 11 No.1, 64-70. Available from https://doi.org/10.1108/WJEMSD-07-2014-0020
9. Anyanwu, J. C. (2012), “Why does foreign direct investment go where it goes? New evidence from African countries”, Annals of Economics and Finance, Vol. 13 No 2, p. 425-462.
10. Asiedu, E. (2006), “Foreign direct investment in Africa: The role of natural resources, arket size, government policy, institutions and political instability”, The World Economy, Vol. 29 No 1, pp. 63-77.
11. Ayadi. R, Emrah A, Sami B. N, and Willem P. D. G. (2013), “Determinants of financial development across the Mediterranean”, MEDPRO Technical Report, No. 29.
12. Bilquess, F., Mukhtar, T., and Sohail, S. (2011), “What matters for financial development in D-8 countries? Capital flows, trade openness and institutions”, Journal of Economic Cooperation and Development, Vol. 1 No. 32, pp. 71–91.
13. Bittencourt, M. (2011), “Inflation and financial development: Evidence from Brazil”, Economic Modelling, Vol. 28 No. 1-2, pp. 91–99.
14. Borensztein, E., De Gregorio, J., and Lee, J.W. (1998), “How does foreign direct investment affect economic growth?”, Journal of International Economics, Vol. 45 No. 1, pp. 115-135.
15. Choong, C., and Chan, S. (2011), “Financial development and economic growth: A review”, African Journal of Business Management, Vol. 5 No. 6, pp. 2017–2027.
16. Chin, M., and Ito, H. (2005), “What matters for financial development? Capital controls, institutions and interactions”, La Follette School Working Paper No. 2005-007.
17. Demetriades, P. O., and Hussein, K. A. (1996), “Does financial development cause economic growth? Time-series evidence from 16 countries”, Journal of Development Economics, Vol. 51 No. 2, pp. 387–411.
18. Desai, M. A., Foley, C. F. and Hines, J.R. (2006), “Capital controls, liberalizations, and foreign direct investment”, The Review of Financial Studies, Vol. 19 No. 4, pp. 1433-1464.
19. Dutta, N., and Roy, S. (2011), “Foreign direct investment, financial development and political risks”, The Journal of Developing Areas, Vol. 44 No.2, pp. 303-327.
20. Etim, N.S., Onyebuchi, O., and Udo, N.C. (2014), “The determinants of FDI and their impacts on the Nigerian Economy from (1975 – 2010)”, Journal of Integrative Humanism-Ghana, Vol. 3, No 2, pp. 74-84.
21. Fakhreddin, F., Nezakati, H., and Vaighan, B. M. (2011), “The determinants of FDI inflow in manufacturing sector of Malaysia”, Journal for International Business and Entrepreneurship Development, Vol. 5 No. 4, pp. 299-314.
22. Gunaydin, I, and Tatoglu, E. (2005), “Does foreign direct investment promote economic growth? Evidence from Turkey”, Multinational Business Review, Vol. 13 No. 2, pp.89-106. Available at https://doi.org/10.1108/1525383X200500010
23. Hair, J.F., Sarstedt, M., Pieper, T.M., and Ringle, C.M. (2012), “The use of partial least squares structural equation modelling in strategic management research: A review of past practices and recommendations for future applications”, Long Range Planning, Vol. 45 No. 5–6, pp. 320–340.
24. Hair, J.F., Black, W.C., Babin, B.J., and Anderson, R.E. (2010), Multivariate data analysis, 7ed. Englewood Cliffs: Prentice Hall.
25. Hair, J.F., Hult, G.T.M., Ringle, C.M., and Sarstedt, M. (2016), A Primer on Partial Least Squares Structural Equation Modelling (PLS-SEM), 2ed., Sage, Thousand Oaks.
26. Henry, P. B., (2000), “Do stock market liberalizations cause investment booms?”, Journal of Financial Economics, Vol. 50 No. 1-2, pp. 301-334.
27. Hermes, N. and Lensink, R. (2003), “Foreign direct investment, financial development and economic growth”, Journal of Development Studies, Vol.40 No. 1, pp. 142-163.
28. Hoyle, R. H. (2000), Confirmatory factor analysis, in H. E. A. Tinsley and S. D. Brown (Eds.), Handbook of Applied Multivariate Statistics and Mathematical Modeling, Academic Press, New York.
29. Huang, Y., and Temple, J. (2005), “Does external trade promote financial development? „, Discussion Paper No. 05/575.
30. Huang, Y (2005), “What determines financial development”, University of Bristol, UK.
31. Hu, L.T. and Bentler, P.M. (1999), “Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives”, Structural Equation Modeling, Vol. 6 No.1, pp. 1-55.
32. Keith, T. (2006), Multiple Regression and Beyond. Pearson Education.
33. Kline, R.B. (2005), Principles and Practice of Structural Equation Modeling. 2nd Edition ed., New York: The Guilford Press.
34. Korgaonkar, C (2012), “Analysis of the impact of financial development on foreign direct investment: A data mining approach”, Journal of Economics and Sustainable, Vol.3 No.6, pp.69-78.
35. Lamouchi, A., and Zouari, E. (2013), “Financial development and capital inflows: The effect on the real exchange rate”, Global Journal of Management and Business Research Finance, Vol.13 No. 3, pp. 30-42.
36. Lee, L. Petter, S., Fayard, D., and Robinson, S. (2011), On the use of partial least squares path modelling in accounting research, International Journal of Accounting Information Systems, Vol. 12 No. 4, pp. 305–328.
37. Levine, R. (1997), “Financial development and economic growth: Views and agenda”, Journal of Economic Literature, Vol. 35 No. 2, pp. 688-726.
38. Levine, R., and S. Zervos (1998), “Stock markets, banks, and economic growth”, American Economic Review, Vol. 88 No. 3, pp. 537-558.
39. Mahawiya. S. (2015), “Financial sector development, inflation and openness: A comparative panel study of ECOWAS and SADC”, ERSA Working Paper, No. 528.
40. Mahmoud, A. A. A. (2010). FDI and local financial market development: A Granger causality test using panel data, Munich Personal RePEc Archive No, 24654.
41. Mbulawa. S. (2015), “Determinants of financial development in Southern Africa Development Community (SADC): Do institutions matter?”, European Journal of Accounting Auditing and Finance Research, Vol. 3 No. 6, pp. 39-62.
42. Mankiw, N.G. and Scarth, W. (2008), Macroeconomics, Third Canadian Edition, Worth Publishers, New York.
43. Mephokee, C., Cholpaisan, A., and Roopsom, T. (2012), “Foreign direct investment leading indicators: The case study of Thailand and Vietnam”, International Journal of East Asian Studies, Vol. 17 No. 1, pp. 67-77.
44. Moosa, I.A. (2002), Foreign Direct Investment: Theory, Evidence, and Practice, Palgrave: New York.
45. OECD (2008) ‘Tax incentives for investment: a global perspective experiences in MENA and non-MENA countries’, Making Reforms Succeed: Moving Forward with the MENA Investment Policy Agenda, OECD, Paris.
46. Omran, M., and, Bolbol, A. (2003), “Foreign direct investment, financial development and economic growth: Evidence from the Arab Countries”, Review of Middle East Economics and Finance, Vol. 1 No 3, pp. 231-249.
47. Reinartz, W.J., Haenlein, M., and Henseler, J. (2009), “An empirical comparison of the efficacy of covariance-based and variance-based SEM”, International Journal of Research in Marketing, Vol. 26 No. 4, pp. 332–344.
48. Sadorsky, P (2011) “Financial development and energy consumption in Central and Eastern European frontier economies,” Energy Policy, Vol. 39 No. 2, pp. 999–1006
49. Shah, M. H. (2013). The effect of macroeconomic stability on inward FDI in developing countries. European Economics and Finance Society, EEFS2013, The 12th Annual EEFS Conference. 20-23, June, 2013. Westin Grand, Berlin, Germany.
50. Shah, M. H., and Qayyum, S. (2015), “Impact of double taxation treaties on inward FDI in Latin American and Caribbean developing countries”, Business & Economic Review, Vol. 7 No. 1, pp. 1-18.
51. Shah, M. H., and Khan, Y. (2016), “Trade liberalization and FDI inflows in emerging economies”, Business and Economic Review, Vol. 8 No. 1, pp. 35-52.
52. Shah, M. H. and Khan, A. U. (2017), “Factors determining capital structure of Pakistani non-financial firms”, International Journal of Business Studies Review, Vol. 2 No. 1, pp. 1-12.
53. Tsikata, G.K., Asante, Y. and Gyasi, E. M (2000), Determinants of Foreign Direct Investment in Ghana, Overseas Development Institute, Portland House, London.
54. UNCTAD (1999). The United Nationals 1999 World Investment Report, UNCTAD.
55. UNCTAD (2018), World Investment Report, Unite Nations Publications, Geneva.
58. Vijayakumar, J., Rasheed, A.A and Tondkar, R.H, (2009) “Foreign direct investment and evaluation of country risk: An empirical investigation”, Multinational Business Review, Vol. 17 Issue: 3, pp.181-204. Available at https://doi.org/10.1108/-1525383X200900023
59. World Economic Forum. (2009). The Financial Development Report 2009.
60. World Economic Forum (2012). The Financial Development Report 2012. Geneva: World Economic Forum.