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Foreign direct investment and inclusive finance: do financial markets and quality of institutions matter?

Author

Listed:
  • Joshua Yindenaba Abor

    (University of Ghana)

  • Richard Adjei Dwumfour

    (Curtin University)

  • Elikplimi Komla Agbloyor

    (University of Ghana
    University of Stellenbosch Business School)

  • Lei Pan

    (Curtin University
    Monash University)

Abstract

We examine the impact of foreign direct investment (FDI) on financial inclusion. To identify the causal effect of FDI on financial inclusion, we use plausibly exogenous source of variations in bilateral investment treaties (BITs) as a novel instrumental variable (IV) for net FDI inflows. Using annual data for a broad panel of 90 countries over the period 2004 to 2017, our results show that FDI improves financial inclusion for both “access to finance" and “use of financial services". This impact is more pronounced for relatively poor countries and developing countries compared to rich and developed countries. We also find that higher financial market development and quality institutions improve financial inclusion directly. Moreover, financial market development and institutional quality can serve as potential channels and moderating variables through which FDI affects financial inclusion. Our results are robust to various estimations and sample splitting and have important implications for policy on financial inclusion.

Suggested Citation

  • Joshua Yindenaba Abor & Richard Adjei Dwumfour & Elikplimi Komla Agbloyor & Lei Pan, 2024. "Foreign direct investment and inclusive finance: do financial markets and quality of institutions matter?," Empirical Economics, Springer, vol. 67(2), pages 773-815, August.
    • Handle: RePEc:spr:empeco:v:67:y:2024:i:2:d:10.1007_s00181-024-02567-2
    DOI: 10.1007/s00181-024-02567-2
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    References listed on IDEAS

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    More about this item

    Keywords

    FDI; Financial inclusion; Financial market development; Institutional quality; Bilateral investment treaties;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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