Relationship between Financial Development and Foreign Direct Investment

This study examines the relationship between foreign direct investment (FDI) and financial development (FD) based on a sample of 93 countries including high-income, upper middle-income and low-income countries. The estimation results for the entire sample indicate that FDI is beneficial instrument to enhance the speed of FD. The empirical results for the high-income countries indicate that FDI stimulates only the loan sector and does not have a significant effect on domestic credit for the private sector. The empirical results for upper middle-income countries show that FDI can speed up the FD of upper middle-income countries. Finally, the results for low-income countries indicate that the effects of both FDI on both the domestic credit sector and domestic credit for private financial sector of FD are unclear and inconsistent