Abstract
FDI is considered as an important source of capital investment for small island economies and is considered as a crucial tool for attaining economic growth and development. Most studies that have been done relating to foreign direct investment (FDI) are rather on the link between FDI and economic growth or even the link between FD and economic growth. Certainly, there is sufficient theoretical rationale to ascertain that FDI does influence the development of financial market of the recipient countries. Hence, basing on the argument that there is a lack of studies done in this area mainly for the case of small island economies, this paper uses a panel vector autoregressive model (PVAR) which caters for both endogeneity and dynamism, and investigates the relationship between FDI and FD over the time period spanning from 1990 to 2013. Actually, the study shows that FDI can be an important ingredient for developing the financial market in small island economies. For instance, a bi-causal relationship between FDI and FD is observed from the results. Also, economic growth has been identified to play a crucial role in boosting financial development in this study. Moreover other interesting relationships have been detected in the PVAR model.
Highlights
Foreign direct investment is considered as an important ingredient to boost economic growth and development of small island developing states (SIDS)
By using a panel vector autoregressive model (PVAR) approach, this empirical study investigates the potential relationship between foreign direct investment and financial market development in selected small island economies over the period 1990-2013
The main findings show that foreign capital is an important determinant for developing the economies financial market
Summary
Foreign direct investment is considered as an important ingredient to boost economic growth and development of small island developing states (SIDS). It is considered as a crucial source of investment capital. SIDS are mainly small economies having a small domestic market. It is observed that FDI has been flowing more significantly in the Caribbean SIDS mainly due to their prox-. How to cite this paper: Fauzel, S. (2016) Modeling the Relationship between FDI and Financial Development in Small Island Economies: A PVAR Approach. S. Fauzel imity to large American markets. SIDS located in Africa, Asia and Oceania have been performing well and have registered relatively higher FDI growth during the 2000s
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