Is FDI Spillover Conditioned on Financial Development and Trade Liberalization: Evidence from UMCs

Abstract

Developing countries take Foreign Direct Investment (FDI) as leverage for economic growth and development as a result of FDI technology spillovers. However, the effect of FDI inflows on economic growth of host countries is conditional on the abilities of those countries in absorbing and accumulating external knowledge. The related literature paid particular attention to the role of the financial system and trade liberalization of recipients. Thus, this paper investigated empirically the intermediary roles of the financial system and trade liberalization as Absorptive Capacity (AC) factors on the FDI led growth nexus. This study provided data evidence from 33 UpperMiddle-income Countries (UMCs) over the period of 1990-2011 to contribute to the existing literature. This empirical study employed the dynamic panel "difference" GMM estimator proposed by Arellano and Bond (1991); since it prevents the biases inherent to economic growth models including auto-correlation, unobserved heterogeneity, and endogeneity between explanatory variables. The results indicated the development of the domestic financial system facilitated FDI technology spillovers in order to enhance the economic growth of UMCs. However, the empirical findings also showed a negative effect of trade openness on stimulating the FDI spillovers.

Inflation Thresholds-Financial Development Nexus in South-Eastern Asian Emerging Markets

“…Inflation consumer prices (annual %) was used as a measure of inflation, stock market turnover ratio as a proxy for stock market development, domestic credit by banks to the private sector (% of GDP) as a proxy for banking sector development whilst outstanding domestic private debt securities as a ratio of GDP was used as a measure of bond market development. Following Nobakht and Madani (2014), this study converted all the data into natural logarithms before any threshold regression analysis could be done in an attempt to do away with data abnormality and autocorrelation bias.…”

The Dynamics of Foreign Direct Investment in BRICS Countries

“…It is against this backdrop that this paper converted the data sets for all variables into natural logarithms in order to make it suitable for econometric analysis, in line with Odhiambo (2008) who argued that normality of datasets is a pre-requisite in econometric modelling. Consistent with Nobakht and Madani (2014), converting the data into natural logarithms ensures that both auto-correlation bias and the impact of abnormal data values are dealt away with. Stead (1996), this means the challenge of multicollinearity does not exist.…”

Examining the Influence of Some Macroeconomic Factors on Foreign Direct Investments

“…developed financial markets or qualified human capital). A well-functioning financial system is playing a significant intermediary role in enhancing positive influence on economic growth (Sghaier and Abida (2013); Nobakht and Madani (2014)). Trade liberalization has the same effect on upper and middle-income countries (Nobakht and Madani (2014).…”

“…A well-functioning financial system is playing a significant intermediary role in enhancing positive influence on economic growth (Sghaier and Abida (2013); Nobakht and Madani (2014)). Trade liberalization has the same effect on upper and middle-income countries (Nobakht and Madani (2014). Furthermore, the relocation decisions are also determined by the quality of local institutional factors (Wang et al, (2013); Alfaro (2016)), foreign investors being interested in the safety and security of the investments, seeking stable economic conditions, legislative transparency and trustworthy political environments.…”