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Determinants of Financial Development in Top and Bottom Remittances and FDI Inflows Recipient Developing Regions—How Does Institutional Quality Matter?

Author

Listed:
  • Shreya Pal

    (Indian Institute of Technology Kharagpur
    Christ Deemed to be University)

  • Mantu Kumar Mahalik

    (Indian Institute of Technology Kharagpur)

Abstract

In this paper, we empirically examine the effects of remittances inflows, foreign direct investment (FDI) inflows, and institutional quality index on financial development index in the top (15 Europe and Central Asian countries) and bottom (29 Sub-Saharan African countries) remittances and FDI recipient developing regions using balanced panel data over the period 1984–2020. We used economic growth and government investment as control variables in the financial development function. The findings from the panel PMG-ARDL model indicate that inflows of remittances, FDI, and institutional quality stimulate (reduce) financial development in the top (bottom) region. This varying finding appears to be conditional on introducing institutional quality in financial development function as moderating factor. It finds that financial development is positively associated with remittance and FDI inflows in the presence of institutional quality as moderating channel for both the regions. Financial development is also significantly associated with economic growth in both regions. The mixed impact of domestic investment on financial development is found in both the regions. Our results are robust to the FGLS technique as an alternative econometric set-up. Interestingly, institutional quality reduces the weak effects of remittances and FDI inflows on financial development in the bottom region. Overall, our findings confirm the Mishkin’s (2009) economic globalization-led (i.e., remittances and FDI inflows) financial development hypothesis.

Suggested Citation

  • Shreya Pal & Mantu Kumar Mahalik, 2024. "Determinants of Financial Development in Top and Bottom Remittances and FDI Inflows Recipient Developing Regions—How Does Institutional Quality Matter?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(4), pages 17108-17139, December.
    • Handle: RePEc:spr:jknowl:v:15:y:2024:i:4:d:10.1007_s13132-024-01772-9
    DOI: 10.1007/s13132-024-01772-9
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