Foreign direct investment-economic growth nexus: The role of domestic financial development in Portugal

Muhammad, Shahbaz and Nuno, Carlos Leitão and Summaira, Malik (2011): Foreign direct investment-economic growth nexus: The role of domestic financial development in Portugal.

Abstract

The aim of present paper is to examine the role of financial development on FDI-Growth nexus using annual data over the period of 1975-2008. The results show that financial development is playing its role well but not satisfactory. This study will provide new guidelines for policy making authorities for Portuguese's economy. The manuscript applies the unrestricted error correction model (ECM) estimator advanced by Inder (1993) while ARDL bounds testing approach is employed to find cointegration among variables. Stationarity issue is investigated by Ng-Perron unit root test. The results show that financial development stimulates economic growth for the case of Portugal. Foreign direct investment also good promoter of economic growth while investment in public capital stock is contributing more as compared to financial development and foreign direct investment. Inflation declines economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign Direct Investment, Growth, Cointegration, Portugal
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics

References

Ahmad, H, S. Alam and M S. Butt (2003) “Foreign Direct Investment, Exports and Domestic Output in Pakistan” The Pakistan Development Review 42, 715-723.

Aitken, B and A. E. Harrison (1999) “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela?” American Economic Review 89, 605-618.

Alfaro Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek (2006) “How Does Foreign Direct Investment Promote Economic Growth: Exploring the Effects of Financial Markets on Linkages?” HBS Working Paper Number: 07-013.

Alfaro, LA, S. Chanda, A, S. Kalemli-Ozcan and S. Sayek (2004) “FDI and Economic Growth: The Role of Local Financial Markets” Journal of International Economics 64, 113-134.

Ang, J B (2008) “Financial Development and the FDI-Growth Nexus: The Malaysian Experience” Applied Economics 41, 1595–1601.

Ang, J B (2009) “Foreign Direct Investment and its Impact on the Thai Economy: The Role of Financial Development” Journal of Economics and Finance 33, 316-323.

Ang, JB and WJ. McKibbin (2007) “Financial Liberalization, Financial Sector Development and Growth: Evidence from Malaysia” Journal of Development Economics 84, 215–233.

Bailliu, Jeannine N (2000) “Private Capital Flows, Financial Development and Economic Growth in Developing Countries” Working Paper 20000-15, Bank of Canada July 2000.

Barro, R J (1991) “Economic Growth in a Cross-section of Countries” Quarterly Journal of Economics 2, 407-443.

Barro, R J and J-W. Lee (1994) “Sources of Economic Growth” Carnegie-Rochester Conf Ser Public Policy 40, 1–46.

Bewley, R A. (1979) “The Direct Estimation of the Equilibrium Response in a Linear Dynamic Model” Economics Letters 3, 357-362.

Blomstrom, M, A. Kokko and M. Zejan (1994) “Host Country Competition and Technology Transfer by Multinationals” Weltwirtschaftliches Archiv 130, 521-533.

Blomström, M. (1989) Foreign Investment and Spillovers, London: Routledge.

Borensztein, E, J. De Gregorio and J-W. Lee (1998) “How Does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics 45, 115-35.

Bowers, W and G. Pierce, (1975) “The Illusion of Deterrence in Isaac Ehrlich’s Work on the Deterrent Effect of Capital Punishment” Yale Law Journal 85, 187-208.

Carkovic, M and R. Levine (2005) Does Foreign Direct Investment Accelerate Economic Growth?. Graham E.M. Moran, T.H. and Blomström, M. (eds.) Does Foreign Direct Investment promote Development: New Methods, Outcomes and Policy Approaches, 195-220, Washington D.C.: Institute of International Economics.

Caves, R. (1974) “Multinational Firms, Competition and Productivity in the Host Country” Economica 41, 176-193.

Chee-Keong, C and K-P. Lim (2009) “Foreign Direct Investment, Financial Development and Economic Growth: The Case of Malaysia” Macroeconomics and Finance in Emerging Market Economies 2, 13-30.

Cotton, L and V. Ramachandran (2001) “Foreign Direct Investment in Emerging Economies” WIDER Discussion Paper No. 2001/82.

De Gregorio, J. (1992) “Economic Growth in Latin America” Journal of Development Economics 39, 58-92.

Ehrlich, I. (1975) “The Deterrent Effect of Capital Punishment – A Question of Life and Death” American Economic Review 65, 397-417.

Ehrlich, I. (1977) “The Deterrent Effect of Capital Punishment Reply” American Economic Review 67, 452-458.

Findlay, R. (1978) “Relative Backwardness, Direct Foreign Investment and the Transfer of Technology: A Simple Dynamic Model” Quarterly Journal of Economics 92, 1-16.

Globerman, S. (1979) “A Note on Foreign Ownership and Market Structure in the United Kingdom” Applied Economics 11, 35-42.

Haddad, M. and A. Harrison (1993) “Are There Positive Spillovers from Direct Foreign Investment?” Journal of Development Economics 42, 51-74.

Hermes, N. and R. Lensink (2003) “Foreign Direct Investment, Financial Development and Economic Growth” Journal of Development Studies 40, 142-163.

Hsu Chih-Chiang and Wu Jyun-Yi (2006) “FDI and Economic Growth: Revisiting the Role of Financial Market Development” Department of Economics, National Central University.

Inder, B. (1993) “Estimating Long Run Relationships in Economics: A Comparison of Different Approaches” Journal of Econometrics 57, 53-68.mati

King, R G and R. Levine (1993) “Finance and Growth: Schumpeter Might be Right” Quarterly Journal of Economics 108, 717–737.

Kokko, A, R. Tansini and M C. Zejan (1996) “Local Technological Capability and Productivity Spillovers from FDI in the Uruguayan Manufacturing Sector” Journal of Development Studies 32, 602–611.

Kokko, A. and M. Blomstrom (1995) “Policies to Encourage Inflows of Technology through Foreign Multinationals” World Development 23, 459-468.

Krogstrup, Signe and Linda Matar (2005) “Foreign Direct Investment, Absorptive Capacity and Growth in Arab Countries,” HEI Working Paper, 2005.

Layson, S K. (1983) “Box-Cox Estimation with Standard Econometric Problems” The Review of Economics and Statistics 65, 160-164.

Levine, R, N. Loayza and T. Beck (2000) “Financial Intermediation and Growth: Causality and Causes” Journal of Monetary Economics 46, 31–77.

Levine, R. and D. Renelt (1992) “A Sensitivity Analysis of Cross-Country Growth Regressions” American Economic Review 4, 942-963.

Lipsey, R. and F. Sjöholm, (2005) “Host Country Impacts of Inward FDI: Why Such Different Answers?” EIJS working paper 192. The European Institute of Japanese Studies.

Ljunwal Christer and Li Junjie (2007) “Financial Sector Development, FDI and Economic Growth in China,” OCER Working Paper-E2007005, Perking University.

Mankiw, G, D. Romer and D. Weil (1992) “A Contribution to the Empirics of Economic Growth” Quarterly Journal of Economics 152, 407-437.

Mansfield, E. and A. Romeo (1980) “Technology Transfer to Overseas Subsidiaries by U.S.-Based Firms” Quarterly Journal of Economics 95, 737-750.

Markusen. J. and A J. Venables (1999) “Foreign Direct Investment as a Catalyst for Industrial Development” European Economic Review 43, 335-338.

Maureen, W. (2001) “The Impact of External Debt on Economic Growth and Private Investments in Kenya: An Empirical Assessment”. A paper to be presented at the Wider Development Conference on Debt Relief 17-18 August 2001, Helsinki.

Omran, M. and A. Bolbol (2003) “Foreign Direct Investment, Financial Development, and Economic Growth: Evidence from the Arab Countries” Review of Middle East Economics and Finance 1, 233-251.

Pesaran, M H, Y. Shin and R. Smith (2001) “Bounds Testing Approaches to the Analysis of Level Relationships” Journal of Applied Econometrics 16, 289-326.

Rehman, M. and M. Shahbaz (2011) “Foreign Direct Investment-Economic Growth Link: The Role of Domestic Financial Sector in Bangladesh” Academy of Taiwan Business Management Review 7, 104-112.

Shahbaz, M, S M A. Shamim and N. Aamir (2010) “Macroeconomic Environment and Financial Sector’s Performance: Econometric Evidence from Three Traditional Approaches” The IUP Journal of Financial Economics 1-2, 103-123.

Shahbaz, M. (2009) “A Reassessment of Finance-Growth Nexus for Pakistan: Under the Investigation of FMOLS and DOLS Techniques” ICFAI Journal of Applied Economics 1, 65-80.

Shahbaz, M. and M. Rehman (2010) “Foreign Capital Inflows-Growth Nexus and Role of Domestic Financial Sector: An ARDL Co-integration Approach for Pakistan” Journal of Economic Research 15, 207-231.

Turner, P. (2006) “Response Surfaces for an F-test for Cointegration” Applied Economics Letters 13, 479-482.

Wang, J Y. (1990) “Growth Technology Transfer and the Long-run Theory of International Capital movements” Journal of International Economics 29, 255-271.