Financial liberalization, Foreign Direct investment (FDI) and Economic Growth: A Panel Dynamic Data Validation

SAIEF EDDINE, AYOUNI and FAKHRI, ISSAOUI and SALEM, BRAHIM (2014): Financial liberalization, Foreign Direct investment (FDI) and Economic Growth: A Panel Dynamic Data Validation.

Abstract

The aim of this study is to show that financial liberalization, as a determinant of financial development, can stimulate the relationship between foreign direct investment (FDI) and economic growth. Two distinct components have been analyzed. The first one is a theoretical component in which we tried to treat the relationship between financial development, internal financial liberalization, and FDI using an endogenous growth model. The second component consists of an empirical study which tried using a panel data to validate the previously stated theoretical relationship. The survey, covering a sample of sixty nine developed and developing countries enabled us to reach three fundamental results. First, when financial systems are non-liberalized, we have noted that FDIs had a negative effect on GDP growth per capita. Second, when FDIs are implemented in countries characterized by their developed financial sector they generate positive effects on growth. This implies that the key variable which determines FDI efficiency is the degree of financial systems liberalization. Consequently, in non-liberalized financial systems FDIs effects on growth are challenged. Third, we showed that financial development level is a strategic variable which positively affects growth

• Item Type: MPRA Paper
• Language: English
• Keywords: financial liberalization, Foreign Direct investment, GMM system
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; G - Financial Economics > G1 - General Financial Markets

References

- Akbas, Y. E., Senturk, M., & Sancar, C. (2013). Testing for causality between the foreign direct investment, current account deficit, GDP and total credit: EvFDInce from G7. Panoeconomicus, 60(6), 791-812.

- Alfaro, L., A. Chanda, S. Kalemli-Ozcan and S. Sayek, 2006; « How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages », NBER Working Paper, n°12522.

- Alfaro L., Chanda A., Kalemil-Ozcan S., and Sayek S., 2004; « FDI and Economic Growth: The role of Local Financial Market », Journal of International Economics, vol. 64, n°1, p.89-112.

- Amemyia, T., and MaCurdy, T, E., 1986; « Instrumental-Variable Estimation of an Error-Components Model », Econometrica, vol.54, p.869-880.

- Audrey Chouchen-Vardier, 2004 ; « Une analyse empirique de l'impact de la libéralisation financière en Afrique subsaharienne sur la période 1983-1996 », Revue Tiers Monde, t. XLV, n° 179, juillet-septembre 2004.

- Bailliu, J. N., 2000; « Private Capital Flows, Financial Development, and Economic Growth in Developing Countries », Working Paper 2000-15, Bank of Canada, July.

- Banque Mondiale 1989; « Rapport sur le développement dans le monde. Systèmes financiers et développement », Washington.

- Baltagi, Badi H., 2005; « Econometric Analysis of Panel Data », 3rd Edition, John Wiley & Sons Ltd.

- Barro, R. J., 1997; « Determinants of Economic Growth: A Cross-Countries Empirical Study »,MIT Press.

- Barro, R. J., and X. Sal-i-Martin, 1995; « Economic Growth », Cambridge, MA: NBER.

- Berthélemy, J.C., and Varoudakis, A., 1998; « Développement financier, réformes financières et croissance : une approche en données de panel », Revue Economique, volume 49, n°1, p.196-206.

- Blomström, M., and Persson, H., 1983; « Foreign Investment and Spillover Efficienc y in an Underdeveloped Economy: Evidence from the Mexican Manufacturin g Industry », World Development, vol.11, p.493-501.

- Blomström, M., and Wolff, E. N., 1994; « Multinational Corporations and Productivity Convergence in Mexico », NBER Working Papers n°3141.

- Borensztein, E., J. De Gregorio and J.W. Lee 1995; « How Does Foreign Direct Investment Affect Economic Growth », National Bureau of Economic Research, Cambridge, MA. NBER Working Paper Series n° 5057.

- Borensztein, E., J. De Gregorio and J.W. Lee 1998; « How does Foreign Investment Affect Growth? », Journal of International Economics, vol.45, p.115-135.

- Breusch, T, S., and Mizon, G, E., and Schmidt, P., 1989; « Efficient Estimation Using Panel Data », Econometrica, vol. 57, n°.3, p.695-700, May.

- Brewer T. L., 1991; « Foreign Direct Investment in Developing Countries: Patterns, policies, and prospects », PRE working paper n°.34.

- Brewer, T. L., 1993; « Government policies, market imperfections and foreign direct investment », Journal of International Business Studies, vol. 24, n°1, p. 101-120.

- Carkovic, M., and Levine, R., 2002; « Does Foreign Direct Investment Accelerate Economic Growth? », University of Minnesota, Working Paper.

- Cass, David, 1965; « Optimum Growth in an Aggregative Model of Capital Accumulation », Review of Economic Studies, vol.32, July, p.233-240.

- Choong, C. K., Yusop, Z., and S-C. Soo, 2004; « Foreign Direct Investment, Economic Growth, and Financial Sector Development: A Comparative Analysis», ASEAN Economic Bulletin, vol.21, n°3, p.278-289.

- Cornwell, C., and Schmidt, P., and Wyhowski, D., 1992; « Simultaneous equations and panel data», Journal of Econometrics, Elsevier, vol. 51, n°.1-2, p. 151-181.

- De Mello, L.R., 1999; « Foreign Direct Investment-led Growth: Evidence from Time Series and Panel Data », Oxford Economic Paper, vol. 51, p. 133-151.

- Dickey, D.A. and W.A. Fuller, 1979; « Distribution of the Estimators for Autoregressive Time Series with a Unit Root », Journal of the American Statistical Association, vol.74, p. 427–431.

- Edison, H., J., Levine, R., Ricci, L., and Slok, T., 2002; « International financial integration and economic growth », Journal of International Money and Finance, Elsevier, November, vol. 21, n°6, p.749-776.

- Goldsmith, R. W., 1969; « Financial Structure and Development », New Haven, CT: Yale University Press.

- Grossman, G. M., and Helpman, E., 1991; « Innovation and Growth in the Global Economy », (Cambridge MA, MIT Press).

- Guillotin, Y., Sevestre, P., 1994; « Estimations de fonctions de gains sur données de panel: endogénéité du capital et effet de sélection », Economie et Prévision, n°16, p.119-135.

- Habibullah, M. S., 1999b; « Divisia Monetary Aggregates and Economic Activities in Asian Developing Economies », (Aldershot: Ashgate).

- Hausman, J. A., 1978; « Specification Tests in Econometrics »,Econometrica, vol.46, p.1251-1271.

- Hausman, J, A., and Taylor, W, E., 1981; « Panel Data and Unobservable Individual Effects », Econometrica, vol. 49, p.1377-1398.

- Hermes, N., and R. Lensink, 2003; « Foreign Direct Investment, Financial Development and Economic Growth », The Journal of Development Studies vol.40, n°1, p.42-161.

- Hsiao, C., 2003; « Analysis of Panel Data », Second Edition, Cambridge University Press.

- Im, Kyung, So., M. Hashem Pesaran, and Yongcheol Shin, 2003; « Testing for unit roots in heterogeneous panels », Journal of Econometrics, vol.115, n°1, p.53–74.

- Ikhide, S., 1992; « Financial Deepening, Credit Availability and the Efficiency of Investment: Evidence of Selected African Countries », Development Research Paper Series, Research Paper n°2.

- King, R. G., and Levine, R., 1993b; « Finance and Growth: Schumpeter May be Right », Quarterly Journal of Economics, August, vol.108, n°3, p. 717-737.

- Kokko, A., 1994; « Technology, Market Characteristics, and Spillovers», Journal of Development Economics, vol.43, p.279-293.

- Kokko, A., R. Tansini and M. Zejan, 1996; « Local Technological Capability and Productivity Spillovers from FDI in the Uruguayan Manufacturing Sector », Journal of Development Studies, vol. 34, p. 602-611.

- Koopmans, Tjalling, C., 1965; « On the Concept of Optimal Economic Growth »,In The Econometric Approach to Development Planning. Amsterdam: North Holland, 1965.

- Kwiatkowski, D., P.C.B. Phillips, P. Schmidt and Y. Shin 1992; « Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root », Journal of Econometrics, vol.54, p.159-178.

- Levin, Andrew, and Chien-Fu Lin, 2002; « Unit Root tests in panel data: Asymptotic and finite-sample properties », Journal of Econometrics, vol.108, n°1, p.1–24.

- Levine, R., 1997; « Financial Development and Economic Growth: Views and Agenda », Journal of Economic Literature, June, vol.35, n°3, p.688-726.

- McKinnon R.I., 1973; « Money and Capital in Economic Development ». Washington, D.C, Brooking Institution.

- Molho, L.E., 1986; « Interest Rates, Saving, and Investment in Developing Countries: A Re-examination of the McKinnon-Shaw Hypoththesis », International Monetary Fund Staff Papers, March, vol.33, n°1, p.90-116.

- Mosley, Paul, 1999; « Micro-Macro Linkages in Financial Markets: The Impact of Financial Liberalization on Access to Rural Credit in Four African Countries », Finance and Development Research program, Development Initiative, Working Paper n°. 4.

- Omran, M., Bolbol, A., 2003; « Foreign Direct Investment, Financial Development, and Economic Growth: Evidence from the Arab Countries »,Review of Middle EastEconomics and Finance, vol.1, p.231-249.

- Ram, R., & Zhang, K. H., 2002; « Foreign Direct Investment and Economic Growth: Evidence from Cross-Country Data for the 1990s », Economic Development and Cultural Change, vol.51, 205–215.

- Ramsey, Frank, 1928; « A Mathematical Theory of Saving », Economic Journal, vo.38, December, p.543-559.

- Ranciere, R., Tornell, A., and Westermann, F., 2006; « Decomposing the effects of financial liberalization: Crises vs. growth»,Journal of Banking and Finance, Elsevier, vol. 30, n°12, p.3331-3348, December.

- Saltz, M., 1992; « The Negative Correlation between Foreign Direct Investment and Economic Growth in the Third World: Theory and Evidence », Rivistainternazionale di scienze economiche e commerciali, vol.39, n°7, p.617-633.

- Shaw, E. S., 1973; « Financial Deepening in Economic Development », New York Oxford University Press.

- Sjöholm F., 1999b; « Do Foreign Contacts Enable Firms to Become Exporters? », Stockholm School of Economics Working paper, n°. 326.

- Xiaoying Li (University of Nottingham, UK) and Xiaming Lui (University of survey, UK), 2004; « Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship », World Development, vol. 33, n° 3, p. 393-407.