Foreign Direct Investment and Financial Development in Taiwan: Analysis on the Economic Growth

Abstract

The relationships between Foreign Direct Investment (FDI), FinancialDevelopment (FD) and Gross Domestic Product (GDP) are complex and requiresophisticated tools to determine their interactions. In a first step, this study will address this problematic with a focus on financial data available in Taiwan. Then, it will investigate the direct relationship between FDI and GDP and between FD and GDP to finally examine whether the association of FDI and FD could enhance specifically GDP. Using the Vector Auto Regression model, tests have been performed on five specific variables from 1981 to 2010 on a monthly basis to get a global picture of the elements that could favor the development of these operations. The results of this paper are partially different from the general trends observed between FDI, FD and GDP. Indeed, they emphasize more specific approaches for Taiwan. First, the unidirectional causality is coming from GDP to FDI and tends to decrease its attractiveness due to high GDP value. Then, only bank-based variables appear to be presently more effective to stimulate GDP while market-based factors may stabilize the benefits of FDI. These findings seem consistent with the outcomes from other financial literature papers and contribute to better understand the FDI & FD mechanisms from a financial perspective in Taiwan.