Financial foreign direct investment and the economic performance of developing countries

I investigate whether developed countries' financial foreign direct investment (FDI) has an indirect impact on the economic performance of developing countries' manufacturing sectors by influencing local financial financing conditions. I combine an interaction approach exploiting sector‐specific financial dependence with a “gravity‐based” instrumental variable strategy to detect a potential “access to external finance” effect. I find that higher greenfield FDI in local retail banking, but not in other financial functions, leads to better economic performance of the manufacturing sectors typically dependent on external finance during the period 2002–2014.