Does foreign direct investment cause financial sector development – evidence from an emerging economy

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Abstract

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.

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