Abstract
Foreign direct investment (FDI) is seen as a prerequisite for gaining and maintaining competitiveness. Simultaneously, the relationship between FDI and financial development (FD) has important implications for the researched economy and its competitiveness. This domain has not been sufficiently investigated, with diverse and contradictory findings evident in the literature. Therefore, this study investigates the effect of FDI on FD for the selected 102 Belt and Road Initiative countries on four continents: Asia, Europe, Africa, and Latin America. Based on data from 1990 to 2017, a set of quantitative techniques, including feasible generalized least squares, and augmented mean group techniques, were used in this study. Our findings indicate that FDI, trade openness, government consumption, and inflation have a statistically significant relationship with FD. FDI, trade openness, and government consumption increased FD in Asia, Europe, and Latin America but decreased in Africa. Inflation shows a negative influence on FD in all continents. Furthermore, the Dumitrescu–Harlin panel causality test confirms a two-way causality relationship among FDI, trade openness, and FD in Asia and Europe. In contrast, a unidirectional relationship exists between FDI and FD in Latin America. The income-wise results reveal that low- and middle-income countries attract more FDI than high-income countries due to high factor costs. These empirical results provide new insights for policymakers, presenting several policy implications for FD competitiveness in the reference regions.
Highlights
Over the past few decades, a drastic increase has been observed in foreign direct investment (FDI) worldwide, which reached $1.35 trillion in 2018
Our results indicate a unidirectional relationship from FDI to financial development (FD) in Latin America, suggesting that FDI granger causes FD, but not the reverse
FDI has a significant positive impact on FD in the Belt and Road Initiative (BRI) countries. These results show that when foreign companies entered into the BRI countries, they came with important financial investments in FDI, franchises, mergers, and acquisitions with the present companies
Summary
Over the past few decades, a drastic increase has been observed in foreign direct investment (FDI) worldwide, which reached $1.35 trillion in 2018. In the Belt and Road Initiative (BRI) countries, FDI inward flows increased from $30.10 billion to $43.38 from 1990 to 2017 (World Bank, 2020). The BRI has undertaken a great initiative to enhance FDI in the global market, which has brought a large amount of global commerce, international lending, and cross-border investment business. Peres et al (2018) has argued that before the global financial crisis of 2008, developed countries received more FDI flows compared with developing countries; after 2008, the situation changed. Global FDI flows from BRI to developing nations increased by 35% after the 2008 financial crisis. The origin/destination of FDI inflows and outflows changed geographically (Buchanan et al, 2012)
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