Influence of FDI on Economic Growth in Developing Countries: The Role of Financial Development

Abstract

The study analyzes the role of financial development in the economic growth stimulating effect of foreign direct investment (FDI) inflows in developing countries. The Threshold AutoRegressive model (TAR) was used to analyze tha data of 23 economies over the period 1995–2019. The results show that there is a threshold value of financial development which changes the effect of FDI on economic growth. The thresholds found for financial development as measured by the ratio of M2 to GDP and credit to GDP are 51,839 and 24,593 respectively. FDI only has a positive effect on economic growth when financial development is equal to or greater than the threshold value. This result confirms the role of financial development as an absorbing factor for the economy to benefit from the effects of FDI.