The ambiguous relationship between FDI and economic growth
Are financial markets important?
Foreign direct investment is an important source of capital for many economies. The inflows of FDI can contribute to productivity through technology transfers. These spillovers should have a positive influence on economic growth. The development of financial markets may play a role in the relationship between FDI and growth. An empirical analysis is carried out to see if the predicted linkages exist in two different samples. The cross-section analysis indicates positive growth effects for FDI in one sample. Financial development interacts negatively with FDI, meaning that a well-developed financial system limits the potential for growth. A panel study confirms these findings, but the results depend on the financial variable included in the regression. It also seems to take time for the domestic economy to absorb and implement the spillovers.