Foreign direct investment and financial markets

In this paper, we analyze the link between FDI and financial market development on economic growth. We focused on whether countries with more developed financial markets are able to exploit FDI more proficiently. Several indicators relating to the working of a country’s financial market have been used. Our estimations are based on an unbalanced and a balanced dataset, covering the period 1985 to 2008. We find no significant direct impact of FDI on economic growth. Also, our results indicate that while the combined impact of FDI and financial market on growth is not significant, stock markets trigger economic growth. Our results are robust across both datasets; even after controlling for other factors affecting economic growth.