Abstract
In this study, we review the literature to find how the financial development of a country attracts foreign direct investments for a sustainable real sector development of the country. The area is least focused on literature. Thus we don’t limit our search and review to any time or database or journal category. We find the theoretical logic and empirical evidence so far available in the literature. Our review finds that the development of the financial sector of a country is one of the most important attractors of FDIs. Theoretically, financial sector development works as a symbol of trust and goodness to the new potential investors and a good resource allocation channel for the existing investors. However, very few researchers find that FDIs are more prone to countries with a low developed financial system which may happen due to the presence of risk-taker foreign investors and risk-averse domestic entrepreneurs.
Highlights
A country’s financial system has been regarded as a crucial factor for sustainable economic advancement (Khan, Islam, & Akbar, 2020; Liu, Islam, Khan, Md Ismail, & Pervaiz, 2020)
A few researchers investigate the direct effect of financial development in attracting foreign direct investment (FDI), the literature still suffers from enriching evidence
- Financial development significantly contributes to attracting FDIs in the long run. - The bidirectional causal relationship between stock market development and FDI while a unidirectional relationship between FDI and banking sector found. -FDI inflow is found to be higher in the countries where the financial system is not up to the mark, institutions are underdeveloped and are suffering from some original sin. -FDI and Financial development are substitutes for each other. - Source and Destination country financial development enhances access to finance which directly and indirectly attracts FDIs. - FDI inflows are largely attracted by banking sector and stock market development. -FDI positively correlates to the market variables and banking variables
Summary
A country’s financial system has been regarded as a crucial factor for sustainable economic advancement (Khan, Islam, & Akbar, 2020; Liu, Islam, Khan, Md Ismail, & Pervaiz, 2020). This system creates the flows of money and keeps the system working (Mollah Aminul Islam, Khan, Popp, Sroka, & Oláh, 2020). According to the school of thought, finance leads to growth while the financial system of a country is developed up to a threshold level (Hasan, Shiming, Islam, & Hossain, 2020; Khan et al., Islam et al, International Journal of Research in Business & Social Science 10(3) (2021), 226-238
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