Role of financial sector development in foreign direct investment inflows in BRICS
-
DOIhttp://dx.doi.org/10.21511/imfi.19(3).2022.18
-
Article InfoVolume 19 2022, Issue #3, pp. 215-228
- Cited by
- 450 Views
-
137 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
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.
- Keywords
-
JEL Classification (Paper profile tab)C33, F21, G15, J24
-
References48
-
Tables8
-
Figures2
-
- Figure 1. Domestic credit to private sector (% of GDP) trends in BRICS
- Figure 2. Net FDI inflow (% of GDP) trends in BRICS
-
- Table 1. Equation (2) signs
- Table 2. Correlation analysis
- Table 3. Descriptive statistical analysis
- Table 4. Stationarity tests (Individual intercept)
- Table 5. Johansen-Fisher panel co-integration test
- Table 6. Financial sector development and FDI inflows – Fixed effects
- Table 7. Financial sector development and FDI inflows – FMOLS
- Table 8. Financial sector development and FDI inflows – Pooled ordinary least squares
-
- Acquah, A. M., & Ibrahim, M. (2019). FDI inflows, economic growth and financial sector development. Journal of Sustainable Finance and Investment, 10(4), 315-334.
- Adeniyi, O., Ajide, B., & Salisu, A. (2015). Foreign capital flows, financial sector development and growth in Sub-Saharan Africa. Journal of Economic Development, 40(3), 85-103.
- Adigwe, P. K., Okaro, C. S., Emejulu, I. J., & Ananwude, A. C. (2018). Banking sector operations and FDI inflows in Nigeria: A causality analysis. Asian Themes in Social Sciences Research, 1(2), 60-75.
- Asong, S. A. (2014). Linkages between investment flows and financial sector development. African Journal of Economic and Management Studies, 5(3), 269-299.
- Aye, G. C., & Edoja, P. E. (2017). Effect of economic growth on CO2 emission in developing countries: Evidence from a dynamic panel threshold regression model. General and Applied Economics.
- Ayouni, S. E., Issaoui, F., & Brahim, S. (2014). Financial liberalization, FDI inflows and economic growth: A dynamic panel data validation. International Journal of Economics and Financial Issues, 4(3), 677-697.
- Bahri, E. N. A., & Nor, N. H. H. M. (2019). Nonlinear effect of financial sector development and FDI inflows in integration economies among ASEAN-5 countries following IFRS adoption. Accounting and Finance Open Access Peer-Reviewed Chapter.
- Bartels, F. L., Alladina, S. N., & Lederer, S. (2009). FDI inflows in Sub-Saharan Africa: Motivating factors and policy issues. Journal of African Business, 10(2), 141-162.
- Calvo, M. B., & Sanchez-Robles, B. (2002). FDI inflows, Economic freedom and Economic growth: New evidence from Latin America (Universidad de Cartabria, Economics Working Paper No. 4/03).
- Chee, Y. L., & Nair, M. (2010). The impact of FDI and financial sector development on economic growth: Empirical evidence from Asia and Oceania. International Journal of Economics and Finance, 2(2), 107-119.
- Chigbu, U. S., Promise, U. C., & Chigbu, E. E. (2016). Study of the influence of the banking sector development on the inflows of foreign investment in Nigeria and Ghana. International Letters of Social and Humanistic Sciences, 72, 63-75.
- Craigwell, M. F. A. W. R. (2012). Economic growth, FDI inflows and corruption in developed and developing countries. Journal of Economic Studies, 39(6), 639-652.
- Dellis, K. (2018). Financial sector development and FDI inflows: Evidence from advanced economies (Bank of Greece Eurosystem Working Paper Number December 2018).
- Denisia, V. (2010). FDI inflows theories: An overview of the main theories. European Journal of Interdisciplinary Studies, 2(2), 104-110.
- Dunning, J. H. (1979). Explaining changing patterns of international production: In defense of the eclectic theory. Oxford Bulletin of Economics and Statistics, 41(4), 269-295.
- Ezeoha, A. E., & Cattaneo, N. (2012). FDI flows to Sub-Saharan Africa: The impact of finance, institutions and natural resource endowment. Comparative Economic Studies, 54(3), 597-632.
- Gitanadya, A. M., & Annisa, P. (2018). The relationship between FDI inflows influx, economic growth and financial institutions in ASEAN-6. In Proceedings of Airlangga Conference on International Relations (ACIR 2018) – Politics, Economy and Security in Changing Indo-Pacific Region, 26-33.
- Hajilee, M., & Nasser, O. M. A. (2015). The relationship between financial market development and FDI inflows in Latin American countries. The Journal of Developing Areas, 49(2), 227-245.
- Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.
- Kamasa, K., Mochiah, I., Doku, A. K., & Forson, P. (2020). The impact of financial sector reforms on FDI inflows in an emerging economy: Empirical evidence from Ghana. Journal of Humanities and Applied Social Sciences, 2(4), 271-284.
- Kaur, M., Yadav, S. S., & Gautam, V. (2013). Financial system development and FDI inflows: A panel data study for BRIC countries. Global Business Review, 14(4), 729-742.
- Keykanloo, M. G., Hosseini, S., Jazeh, K. E., & Askari, A. (2020). The effect of financial sector development on FDI inflows. Iran Economics Review, 24(4), 885-906.
- Korgaonkar, C. (2012). Analysis of the impact of financial sector development on FDI inflows: A data mining approach. Journal of Economics and Sustainable Development, 3(6), 70-78.
- Kpodar, K., & Goff, M. L. (2012). Do remittances reduce aid dependency? (International Monetary Fund Development Policies Working Paper Number 34).
- Kumar, N., & Pradhan, J. P. (2002). FDI, externalities and economic growth in developing countries: Some empirical explorations and implications for WTO negotiations on investment (RIS Discussion Paper No. 27/2002). New Delhi, India.
- Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
- Ljungwall, C., & Li, J. (2007). Financial sector development, FDI and economic growth in China (Working Paper Series Paper Number E2007005). Stockholm School of Economics and CCER, Peking University.
- Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.
- Malefane, M.R., & Odhiambo, N.M. (2018). Impact of trade openness on economic growth: Empirical evidence from South Africa. International Economics, 71(4), 387-416.
- Mishra, P. K., & Mishra, S. K. (2019). FDI inflows and financial sector development in India. Indian Journal of Applied Economics and Business, 1(1), 21-33.
- Nkoa, B. E. O. (2018). The specific growth effects of FDI in Africa: The role of finance. Revue d’economie du development, 26(3), 33-63.
- Nor, N. H. H., Low, S., Nor, A. H. S. M., & Ghazali, N. A. (2013). FDI and economic growth: Does the quality of banking development matter? Gadjah Mada International Journal of Business, 15(3), 287-303.
- Pham, H. T., Gan, C., & Hu, B. (2022). Causality between financial sector development and FDI inflows in Asian developing countries. Journal of Risk and Financial Management, 15(195), 1-26.
- Romer, P. (1986). Increasing returns and long run economic growth. Journal of Political Economy, 94(5), 1002-1037.
- Sahin, S., & Ege, I. (2015). Financial sector development and FDI in Greece and neighbouring countries: A panel data analysis. Procedia Economics and Finance, 24(2015), 583-588.
- Sasmaz, M. U., & Gumus, E. (2018). The impact of development in banking sector and FDI inflows on economic growth: Sample of Turkey. International Journal of Advanced and Applied Sciences, 5(12), 30-35.
- Seenivasan, R. (2014). Analysis of the relationship between FDI and economic growth. Advances in Management, 7(1), 1-23.
- Sghaier, I. M., & Abida, Z. (2013). FDI inflows, financial sector development and economic growth: Empirical evidence from North African countries. Journal of International and Global Economic Studies, 6(1), 1-13.
- Shah, M. H. (2016). Financial sector development and FDI inflows: The case of Middle East and North African (MENA) developing nations (Munich Personal RePEc Archive Working Paper Number 82013).
- Solow, R. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65-94.
- Solow, R. M. (1957). Technical change and aggregate production, Review of Economics and Statistics, 39(3), 213-320.
- Stead, R. (2007). Foundation quantitative methods for business. England: Prentice Hall.
- Swan, T. (1956). Economic growth and capital accumulation. The Economic Record, 32(2), 334-361.
- Tsaurai, K., & Makina, D. (2018). The impact of financial sector development on FDI inflows: An empirical study on minimum threshold levels. Journal of Economics and Behavioural Studies, 10(5), 244-254.
- Tsaurai, K., & Ngcobo, L. (2018). The role of liquidity in the remittances-human capital development nexus in emerging economies, OEconomica, 14(7), 101-119.
- UNCTAD. (2012). World Investment Report. New York: United Nations.
- Veselinovic, N., & Despotovic, D. (2022). Financial sector development, FDI inflows and economic growth: Panel causality approach. Industrija, 49(3/4), 47-61.
- Wang, H., & Xie, X. (2009). On effects of FDI inflows on economic growth. International Business Research Journal, 2(4), 100-108.