Attaining economic growth through financial development and foreign direct investment

Abstract

PURPOSE : The purpose of this paper is to consider the heterogeneous relationship among financial development, foreign direct investment (FDI) and economic growth, examining the possible directions of causality among them in both the short and long runs. DESIGN/METHODOLOGY/APPROACH : A sample of the G-20 countries over the period 1970–2016 is utilized. A vector error-correction model is used to consider the possible directions of causality among financial development, FDI and economic growth. FINDINGS : Results suggest a cointegrating relationship among the three series. Although short-run links among the variables are mostly non-uniform, both financial development and FDI matter in the determination of long-run economic growth. PRACTICAL IMPLICATIONS : Attention must be paid to policies that promote financial development. This, in turn, calls for fostering incentives to guarantee continued support to liberalize the economy and promoting capital openness. Additionally, financial infrastructure should be improved to improve financial innovation. The establishment of a well-developed financial market, including well-functioning banks and other financial institutions, can facilitate further investment and an easier means of raising capital to support the activities of FDI. Economic growth can ultimately be elevated through both financial development and FDI. ORIGINALITY/VALUE : The study considers a sample of the G-20 countries, which have received relatively little attention in the existing literature. In addition, the study concurrently analyses the trivariate causal relationship among financial development, FDI and economic growth, a topic on which there has been a dearth of research.