Abstract:
This paper investigates the key factors affecting the foreign direct
investment (FDI) inflow to developing countries during the period
(1995-2010) with emphasis on the financial development. Financial
development, as an important factor in FDI absorption and a
prerequisite for utilizing the benefits of FDI, not only increases the FDI
inflow in developing countries, but also improve the absorption
capacity and ability of these countries to utilize the benefits of FDI.
Since the financial system consists of several components and provides
a variety of services, various indicators, which represent the
development of different aspects and components of financial system,
have been applied in order to assess the impact of financial
development on the FDI. Results indicate that development of various
components of financial system (stock market and banking sector) as
well as different aspects of financial development (size and activity level
of financial system) all have positive and significant impact on the FDI
inflow in developing countries during the studied period.
Machine summary:
"Results indicate that development of various components of financial system (stock market and banking sector) as well as different aspects of financial development (size and activity level of financial system) all have positive and significant impact on the FDI inflow in developing countries during the studied period.
By developing a theoretical framework about the mechanisms of FDI impact on the economic growth through creating the backward linkages, Alfaro et al (2006) indicates that if financial markets developed enough, the host countries will benefit from the backward linkages between the foreign and domestic firms, which lead to the positive spillovers for the whole economy.
FD: Financial system development has an important effect on the FDI inflow and utilization of its advantages especially new knowledge and new technologies by reducing the transaction costs through decreasing the information asymmetry and better hedge and management of risk, improving the efficiency of resource allocation, financing and covering the risks associated with new technologies, providing the credit needed for the foreign investors, financing a part of foreign investment through permitting the stock sale in the domestic stock market, linking the domestic and foreign investors, and creating the backward linkages with the domestic firms.
In general, the results of Table (5) indicate the significant and positive impact of financial system (banking sector and stock market) development (size and activity) on the FDI inflow.
Results of this study can be summarized as follows: First, development of financial system components (banking sector and stock market) and also different dimensions of financial development (total size of financial system and its activity) have significant and positive impact on the FDI inflow in developing countries."