Role Of Financial Sector Development Research Articles

FDI–Growth Nexus in Emerging Economies: Role of Financial Sector Development

This paper examined the relationship between foreign direct investment (FDI) inflows and the growth rate in emerging and developing economies (EMDEs) and whether the development of the financial sector affects the growth-effect of FDI inflows for these economies. FDI enhances capital accumulation in the economy, and the level of financial sector development (FSD) affects the financial intermediation of funds, thereby enhancing the absorptive capability from investment. Using the dynamic panel threshold model (DPTM) for a balanced panel of 71 countries over the period 2000–2019, the paper finds a U-shaped relationship between the measures of FSD and the growth rate of an economy and does not find evidence for the ‘vanishing effect of finance’ for EMDEs. The growth-enhancing effect of FDI is much stronger for countries with a higher level of FSD. Our estimation techniques control for cross-sectional dependence and endogeneity in the case of a dynamic framework. The robustness results estimated using four-year non-overlapping averages as an observational unit support the findings. JEL Codes: F23, F36, O16

External shocks and macroeconomic volatility in Nigeria: does financial development moderate the effect?

PurposeMotivated by the negative effect of external shocks on the domestic economy, this study explores the role of financial sector development in absorbing the effect of external shocks on macroeconomic volatility in Nigeria.Design/methodology/approachAutoregressive distributed lag and fully modify ordinary least square are used to examine the moderating effect of financial development in the link between external shocks and macroeconomic volatilities in Nigeria between 1986Q1 and 2019Q4. External shock is proxy using oil price shock, and financial development is proxy by domestic credit to the private sector and market capitalisation. At the same time, macroeconomic volatility is proxy by output and inflation volatilities. Macroeconomic volatilities are generated using generalised autoregressive conditional heteroskedasticity (GARCH 1,1).FindingsThe results indicate that domestic credit to the private sector significantly reduces output and inflation volatilities in Nigeria in the short and long run. However, market capitalisation promotes macroeconomic volatility. More specifically, financial development indicators play different roles in curtaining macroeconomic volatilities. The results also reveal that external shocks stimulate macroeconomic volatility in Nigeria in the short and long run. Nevertheless, the effects of external shocks on macroeconomic volatilities are reduced when the role of financial development is incorporated.Practical implicationsThis study, therefore, concludes that strong financial sector development serves as a significant shock absorber in reducing the adverse effect of external shock on the domestic economy.Originality/valueThis study contributes to the extant studies by introducing a country-specific analysis into the empirical examination of how financial development can moderate the influence of external shock on macroeconomic volatilities.

External finance dependence, financial development and exports: a firm-level study from India

PurposeThis study aims to add to the growing literature on the trade–finance nexus by exploring the interplay between a country's level of financial development, the external finance dependence of firms and their exporting decisions.Design/methodology/approachThe study first develops a theoretical model to motivate the idea that a firm's liquidity (financial) position and its home country's level of financial development act as substitute factors in its export market entry decisions. It then empirically tests whether an improvement in a country's financial development level enhances the number of entrants in the foreign markets and boosts the exports of incumbent exporters using firm-level data of manufacturing firms in India for the period 1993–2020.FindingsEmpirical results suggest that a higher level of financial development helps increase the exporting probability of firms that rely more on external finance for their operations. Further, the study finds that the sunk costs-induced hysteresis effect plays a major role in firms' exporting decisions and financial factors don't play a significant role in the exporting activities of incumbent exporters.Practical implicationsThe findings suggest that a well-developed financial market is necessary to help more and more firms initiate their foreign market operations. The results underscore that trade-liberalisation measures alone may not increase India's exports and the government must complement them with financial sector reforms.Originality/valueStudies highlighting the role of financial sector development in helping financially-constrained Indian firms overcome the entry barriers associated with exporting are extremely limited. This study contributes to this nascent literature by conducting an empirical investigation on an extensive database of Indian manufacturing firms. Moreover, in contrast to the previous firm-level studies in this area, this empirical analysis uses the actual values of external finance raised by the firms as a critical factor in determining their extensive and intensive margin of exports instead of the usual balance sheet variables such as liquidity and leverage.

Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development

PurposeThis study aims to explore the impact of monetary policy on bank lending rate with the moderating effects of financial sector development for eight Asian developing economics.Design/methodology/approachThis study uses panel autoregressive distributed lag/pooled mean group estimation over the period ranging from 1980 to 2020.FindingsThe empirical results exhibit an inverse link between monetary policy measured by broad money supply on the bank lending rate, indicating that the increase in the money supply by the central bank lowers the demand for loans and thereby lowers the cost of loan. Moreover, financial sector development decreases the lending rate and thus lowers cost of loan. It is also noted that the interactive term of monetary policy by lending broad money supply and financial sector development showed a positive impact on the lending rate in selected Asian developing countries during the period under the study.Practical implicationsThe outcomes have many relevant policy implications that stronger financial development sector contributes to the efficiency of monetary policy. Regulators and policymakers are therefore recommended to pursue greater financial sector development to lower the cost for fund searchers and to lower the cost of loans, money supply increase is suggested.Originality/valueThis study contributes to the extant literature on the factors affecting lending rate with the prime aims of monetary policy effectiveness. This study also included financial sector development with some other variables and an interactive term of monetary policy with financial development to have new insight impact of both on the lending rate in developing Asian economies.

The Role of Financial Sector Development and Educational Attainment in the Achievement of Economic Sustainability: Evidence from BRICS Economies

The worldwide serious deteriorations in environmental and social quality have led many countries to follow institutional, social, and economic policies eliminating the negative environmental and social costs of economic growth and development, urbanization, and population growth. This study investigates the influence of financial sector development and educational attainment on economic sustainability in a sample of BRICS economies over the 1995–2020 term through causality and cointegration tests. The results of the causality test find a bidirectional causal interplay between financial development and economic sustainability and a unilateral causal effect from educational attainment on economic sustainability. Furthermore, cointegration analysis unveils a long-term positive influence of financial development and educational attainment on economic sustainability, but the effect of educational attainment on economic sustainability is ascertained to be slightly higher when compared with that of financial sector development. As a result, both educational attainment and financial development with environmental and social measures can be useful instruments to achieve economic sustainability.

Financial sector development and energy poverty: empirical evidence from developing countries.

This study empirically assesses the significance of financial sector development in determining the energy poverty of developing countries. The study utilizes a sample of 110 developing economies over a period ranging from 1990 to 2020. The analysis is based on the traditional econometric techniques comprising pooled OLS, fixed-effects, and random-effects and Driscoll and Kraay's robust standard error approach for pooled OLS, fixed effects, and random effects. To account for a possible endogeneity problem, the study also uses the system GMM model. Our empirical outcomes verify a positive role of financial sector development in alleviating energy poverty of the sample economies. The findings also provide a supportive role of output growth, foreign direct investment, and urbanization in helping accessibility to energy services. These outcomes have strong policy implications for developing economies.

Monetary policy, financial development and firm investment in Pakistan: an empirical analysis

PurposeThis paper aims to empirically examine the presence of a balance sheet channel (BSC) of monetary transmission mechanism (MTM) using firm-level panel data of Pakistan. It also explores the role of financial sector development (FSD) and firm age (FAge) in formulating the effect of monetary policy (MP) on the investment decisions of firms.Design/methodology/approachThe authors applied the two-step system generalized method of moments (SYS-GMM) estimator proposed by Blundell and Bond (1998) to carry out the empirical analysis. The final sample of the study includes 450 nonfinancial firms listed at the Pakistan Stock Exchange (PXS) during the period 1988–2021. The empirical framework of the study is based on the new classical model of investment. Different measures of MP are used to obtain the robust empirical evidence. To take into account the different dimensions of FSD, the index developed by Svirydzenka (2016) is utilized. To examine the moderating role of FSD and FAge, the interacted model is estimated, which enables the authors to estimate the MP effects at different percentiles of the moderating variables.FindingsThe study’s findings confirm the existence of BSC by revealing that MP instruments have negative, significant effects on firms’ investment decisions. These findings suggest that during periods of tight MP, firms significantly cut their investment expenditures. The results of the interacted model show that both FSD and FAge play an important role in lessening the adverse effects of MP on firms’ investment policy. Specifically, the calculated total effects suggest that the negative effect of MP on investment is considerably weaker at the higher percentiles of FSD and FAge.Practical implicationsThe findings of the study have several important policy implications for different stakeholders. Specifically, the evidence suggests that the monetary authorities should keep in mind the adverse effects of MP while designing tight MP. The tight MP will have a negative effect on firm investment, which, in turn, will adversely affect firm growth and subsequently the growth rate and level of employment in the economy. Thus, during episodes of tight MP, the authorities should provide other facilities such as a friendly tax environment, better legal and regulatory framework, special credit arrangements, and provisions of loan guarantees. The findings of the moderating role suggest that the government may improve FSD to minify the adverse impacts of tight MP. Finally, the findings suggest that the government should design external financing-friendly policies to provide more opportunities to newly established firms to avoid tight MP’s effects.Social implicationsThe findings of the moderating role suggest that the government may improve FSD to minify the adverse impacts of tight MP. Finally, the findings suggest that the government should design external financing-friendly policies to provide more opportunities to newly established firms to avoid tight MP’s effects.Originality/valueThere are three significant contributions of the paper. Firstly, it provides empirical evidence on the existing of BSC of MTM using firm-level panel data spanning over 43 years for an emerging and small economy, namely Pakistan. Secondly, it examines the moderating role of FSD and FAge in formulating the effects of MP. Finally, it presents the total impact of MP at different percentiles of FSD and FAge, which definitely broadens the understanding of MTM through indirect channels.

Foreign Direct Investment and Inclusive Growth: The Role of the Financial Sector Development

This study examined the role of the domestic financial sector development in the relationship between foreign direct investment (FDI) inflows and inclusive growth in Nigeria over the period, 1981-2020 using annual time series. Analytically, the study employed the autoregressive distributed lag approach of cointegration. The bound test result shows that there is a long-run relationship between inclusive growth and financial sector development, as well as the other underlying variables. Empirically, the result reveals that the FDI exerted a significant positive effect on inclusive growth when the domestic financial sector has reached a certain minimum level of development. The result further shows that the FDI alone has a significant negative effect on inclusive growth. This means that FDI alone does not necessarily increase the well-being of the people, except when a certain minimum level of financial sector development is attained. This is evidence that the domestic financial sector development is a pre-condition for FDI to effectively promote inclusive growth in Nigeria. Therefore, the study recommends that the development of the domestic absorptive capacity-financial sector development should be extended by promoting reforms that will translate FDI inflow into inclusive growth.

Role of financial sector development in foreign direct investment inflows in BRICS

This study examined the influence of financial sector development on FDI inflows in BRICS using panel data (1991–2020) analysis methods. The influence of the complementarity between the financial sector and human capital development on FDI inflows was also examined in the context of BRICS using the same data set and econometric methodologies. The advantage of this study is that the results are used as a basis by BRICS countries to develop financial sector development policies that attract significant FDI inflows. Financial sector development (model 2 and 3 of the pooled ordinary least squares approach) significantly enhanced FDI inflows. Human capital development (model 3 of the fully modified ordinary least squares) was found to have had a significant positive effect on FDI inflows in BRICS group of countries. The combination between financial and human capital development under (1) model 1 of the fully modified ordinary least squares and (2) models 2 and 3 of the pooled ordinary least squares (POLS) was observed to have significantly enhanced FDI inflows in BRICS. The study outlines the financial and human capital development recommendations that need to be implemented to facilitate more FDI inflows. Acknowledgment Kunofiwa Tsaurai is grateful for the moral support from his employer, University of South Africa.

Environmental Risk and Foreign Direct Investment: the role of Financial Sector Development

The study examines the role of financial sector development in the relationship between Foreign direct investment (FDI) and environmental risk using a more comprehensive measurement of financial sector development. The study set up a panel dataset to cover 45 Sub-Saharan African economies from 1982 to 2018 and applies the system GMM technique to accommodate the dynamic nature of the dataset and make provisions for endogeneity and heteroskedasticity in the series. The findings suggest that the unmitigated effect of FDI on environmental risk is detrimental. However, FDI conditioned on the local financial sector development minimizes environmental risk. Again, the findings suggest that countries with low financial sector development indicators report worse environmental risk than their counterparts.The financial sector development is a composite index comprising financial depth, access, and efficiency. Hence, as a matter of policy, we suggest that countries should make a conscious effort to further develop these components by investing in financial infrastructures like technology, regulations, and institutions.

Foreign Direct Investment and Inclusive Growth in Nigeria: The Role of the Financial Sector Development

This study examined the role of the domestic financial sector development in the relationship between foreign direct investment (FDI) inflows and inclusive growth in Nigeria over the period, 1981-2020 using annual time series. Empirically, the result reveals that the FDI exerted a significant positive effect on inclusive growth when the domestic financial sector has reached a certain minimum level of development. The result further shows that the FDI alone has a significant negative effect on inclusive growth. This is evidence that the domestic financial sector development is a pre-condition for FDI to effectively promote inclusive growth in Nigeria.

Role of Financial Sector Development in the Nexus Between Inclusive Growth and Poverty: A Regional Comparative Analysis from Sub-Saharan Africa

The problem of poverty in the developing countries and what makes Sub-Saharan Africa (SSA) a region with the “highest number of poor people” in the world remains a topical issue that requires serious research attention. Following extant studies, in which the mediating role of financial sector development has not been taken into consideration in their finance- growth and poverty nexus, this study deviates by using two measures of poverty level: absolute and multidimensional poverty level; and at the same time provides comparative analyses at SSA sub-regional communities. Our findings reveal that the effects of inclusive growth on poverty reduction (both absolute and multidimensional level), for most sub-regions in SSA except Central African countries, are positive. While the mediating role of financial sector development appeared to be slightly different with mixed results. In West and Central African countries, the mediating role of the financial sector, though very weak, complements theinclusive growth effects on poverty reduction. On the contrary, financial sector development does not complement inclusive growth when it comes to poverty reduction in South African countries. Also, financial sector development does not complement the absolute poverty reduction effect of inclusive growth in the East African sub-region but the result is otherwise under multidimensional poverty reduction. Therefore, we recommend that financial sector development in most SSA countries should be improved upon through relevant monetary policy that promotes financial innovations, financial sector reforms, efficiency in financial inclusion across the region, and at the same time efforts should be geared toward directing some of the gains in financial sector development to inclusive growth-enhancing activities in southern African sub-region

Foreign Direct Investment and Economic Growth in Guyana: The Role of Financial Sector Development

This paper empirically examines how financial sector development affects the FDI-economic growth nexus in Guyana. The novelty is that we examine the relationship in a poor, Small Island Developing State (SIDS) with an underdeveloped financial sector, and where the bulk of FDI flows to the extractive sector. Using annual data from 1981 to 2014, and, both a VECM and ARDL framework that distinguishes among long-run and short-run causal impacts, we provide new insights on why FDI may have a smaller impact on economic growth in SIDS or resource-rich countries. Specifically, we find that FDI dampens long-run growth in Guyana, which is consistent with the extractive literature, but through interaction with the financial sector, FDI has a positive offsetting effect at all levels of financial development in the period under study. While our findings have several nuanced policy implications on how to maximize the developmental potential of FDI in Guyana, they may be relevant to other SIDS or resource-rich countries.

Can Remittance Inflow Fosters Economic Growth? What Matters? Evidence from Sub-Sahara African Countries

This study investigates the impact of remittance inflow on the economic growth of sub-Saharan African countries by considering the role of financial sector development, institutional quality, and economic freedom. The study includes 26 sub-Sahara African countries over the period 2010–2019. By employing the two-step system GMM, the finding shows remittance alone hurts economic growth. When remittance interacts with financial sector development, institutional quality, and economic growth, the coefficient of the interaction term is positive. The study concludes that a well-developed financial sector, better institutional quality, and economic freedom mitigates the negative impact of remittance inflow on economic growth.

An Empirical Study on the Relationship of Financial Sector Development, Remittances Inflows, and Income Inequality in South Asian Countries

The study explores the moderating role of financial sector development in the remittances-income inequality nexus in the six highest remittances-recipient “South-Asian economies”, “namely “Afghanistan, Bangladesh, India, Nepal, Sri Lanka, and Pakistan”” for the period 2006 to 2019. The direct channel of remittances-income inequality and the financial sector development & income-inequality have been greatly explored in the literature, but the indirect channel, i.e. the moderating role of the financial sector in the remittances- income inequality nexus, is still lacking; this study tries to fill this literature gap. The study explores the indirect link of the financial sector based on financial access, financial stability, financial depth, and financial efficiency in remittances-income inequality nexus in highest remittances-recipient South-Asian economies. The study applied Fixed effects and Pooled Ordinary Least Squares (POLS) econometric techniques in order to examine the role of financial sector development in the relationship between international remittances and income inequality. The empirical findings of the study show that the financial sector development mitigates the income-inequality effects in the selected remittance-recipient South-Asian economies. The interaction term of financial sector development and remittances mitigate the negative influence of income inequality in the selected economies. Remittances abridge income inequality in the presence of a well-functioning and sound financial sector in the selected South-Asian remittance-recipient economies.

Remittances and Economic Growth: Exploring the Role of Financial Development

Over the last several decades, the amount of international migration has increased dramatically, resulting in enormous cash flows to labour-exporting nations. The importance of remittances in sustaining families in poor nations has been well acknowledged by many researchers but at the same time a well-functioning banking system has been deemed important to increase migrant transfers by lowering prices and improving service availability. Therefore, this study attempts to analyse the role of financial sector development in enhancing the effect of remittances in spurring economic growth. This study uses time series data for the period of 198-2020 to delve into the nexus. Using ARDL approach, this study finds the complementary role of remittances and financial sector in both long run and short run.

Rethinking the Role of Financial Sector Development in the Foreign Direct Investment-Economic Growth Nexus: Evidence From Ghana

Rethinking the Role of Financial Sector Development in the Foreign Direct Investment-Economic Growth Nexus: Evidence From Ghana

Effects of Exchange Rate Volatility on Economic Growth: Evidence from West Africa

The implications of exchange rate movement for economic growth have become a growing focus of attention in the recent policy debate and the debate concentrate on the degree of volatility in the exchange rate. Exchange rate volatility is usually a risk that will result in higher costs for risk-averse investors, who may adopt a wait-and-see policy until the uncertainty subsides, thereby leading to reduced employment opportunities and slower growth. Thus, in judging the desirability of exchange rate volatility, this paper studies the effects of exchange rate volatility on economic growth for twelve West African countries: The Gambia, Ghana, Cote d'Ivoire, Mali, Niger, Nigeria, Senegal, Togo, Benin, Burkina Faso, Guinea Bissau, and Sierra Leone. Furthermore, the almost complete neglect of the financial sector development in the growth prospect of West African countries is still rather surprising since economic intuition and theory suggest that the growth of the financial sector by means of indebtedness and credit expansion does provide an average GDP growth rate. However, the financial markets and institutions in the West African countries are narrow and shallow. Thus, these countries do not have the tools to hedge exchange rate risks. Hence, fluctuating exchange rates often generate uncertainty, which leads to a decline in economic activity. Therefore, this study also analyzes the role of financial sector development on the impact of exchange rate volatility on economic growth of the West African economies. The random-effects and the two-step difference Generalized Method of Moment GMM estimation techniques are used in this analysis. The “Ad hoc method” is employed by using the lagged term of exchange rate movements for a robustness check in the random-effects model. The results support that the depreciation of the real effective exchange rate volatility has a contractionary effect on economic growth in West African countries and this contractionary effect decreases with countries’ financial sector development. Our results are also support the random effect “Ad hoc methodology” and the GMM procedure implying that they are robust to the cross-section correlation and reverse causality considerations. We also showed that depreciation of real exchange rate is again contractionary for the West African countries in the short run as well as in the long run using GMM procedures. The study recommends that the authorities in the West African countries should speed up the development of their financial sector to decrease the negative effects of exchange rate volatility thereby encouraging economic growth.

Asymmetrical and Symmetrical Relationship between Financial Sector Development and Economic Growth: Evidence From Nepal

The financial sector plays a pivotal role in accumulating and mobilizing funds within the economy, the sector that produces feedback effects for the economic progress of the nation. This paper examines the symmetrical and asymmetrical relationship between financial sector development and economic growth in Nepal. With time series data spanning from 1975 to 2019 AD, both symmetric autoregressive distributed lag (ARDL) and asymmetric effect ARDL (NARDL) models were employed in this paper. Furthermore, the study applied principal component analysis (PCA) to develop the financial sector development indicator. The findings revealed the pivotal role of financial sector development in driving economic growth in Nepal, although significant negative asymmetrical effects posed challenges to long-term growth. Additionally, alongside financial sector progress, factors—such as inflation and learning by doing—contributed to growth, while trade alone failed to have sufficient potency to spur economic expansion. While financial sector development enhanced Nepal's productive capacity, it was not observed singularly driving trade-led growth. Policymakers must prioritize relaxing policies and funneling resources effectively toward fostering financial sector growth and counteract potential negative impacts on economic development.

The role of financial development on the underground economy in regards to Europe’s 2020 strategy

This paper attempts to investigate the relationships between development in the financial sector and the size of the underground economy in European Union countries. Our aim is to investigate the role of financial sector development when it comes to the size of the underground economy, as well as how financial development aids in meeting the growth objectives of the ‘Europe 2020 Strategy’. Panel data analysis will be conducted for the period 2004–2017 in order to examine the effects of financial sector development on the size of the underground economy. The main findings of this paper suggest that financial development has a significantly reducing effect on the size of the underground economy. In conclusion, development within the financial sector significantly lessens underground economic activity in the European Union. With further development of the financial sector, underground economies will not be an obstacle for the fulfilment of the cohesion and growth objectives of the Europe 2020 strategy.