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Financial market development in host and source countries and their effects on bilateral foreign direct investment

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  • Donaubauer, Julian
  • Neumayer, Eric
  • Nunnenkamp, Peter

Abstract

We study an underexplored research question, namely whether financial market development in both host and source countries has an effect on bilateral stocks of foreign direct investment (FDI) and, particularly, whether the effect of financial market development in one member of the country pair conditions the effect of financial market development in the other member. We estimate gravity-type models in a global sample of 43 source and 137 host countries over the period 2001–12. We address reverse causality concerns by restricting the sample to observations where reverse causality, if existent, should be less relevant. Our major and robust findings are that bilateral FDI increases with better developed financial markets in both the host and the source country and that for developing host countries, financial market development in source and host countries functions as substitutes for each other.

Suggested Citation

  • Donaubauer, Julian & Neumayer, Eric & Nunnenkamp, Peter, 2020. "Financial market development in host and source countries and their effects on bilateral foreign direct investment," LSE Research Online Documents on Economics 102996, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:102996
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    Cited by:

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    2. Joseph P. Joyce, 2021. "The sources of international investment income in emerging market economies," Review of International Economics, Wiley Blackwell, vol. 29(3), pages 606-625, August.
    3. Hongjun Zeng & Ran Lu & Abdullahi D. Ahmed, 2023. "Dynamic dependencies and return connectedness among stock, gold and Bitcoin markets: Evidence from South Asia and China," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 49-87, March.
    4. Samira Ben Belgacem & Moheddine Younsi & Marwa Bechtini & Abad Alzuman & Rabeh Khalfaoui, 2024. "Do Financial Development, Institutional Quality and Natural Resources Matter the Outward FDI of G7 Countries? A Panel Gravity Model Approach," Sustainability, MDPI, vol. 16(6), pages 1-24, March.
    5. Mehmet Pinar & Thanasis Stengos, 2021. "Democracy in the neighborhood and foreign direct investment," Review of Development Economics, Wiley Blackwell, vol. 25(1), pages 449-477, February.
    6. repec:wsr:wpaper:y:2020:i:194 is not listed on IDEAS
    7. Tien Nguyen & Dung Phuong Hoang & Thang Ngoc Doan, 2022. "On the uncertainty-global bank linkage nexus: The moderation of crises, financial regulations, and institutional quality," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(4), pages 623-645, October.
    8. Xueting Liao & Cheng Yu & Lijuan Xie, 2024. "Do Bank Linkages Facilitate Foreign Direct Investment? An Analysis of Global Evidence," Sustainability, MDPI, vol. 16(22), pages 1-16, November.
    9. Ramesh Bommadevara & Akshay Sakharkar, 2021. "Do Good Institutions and Economic Uncertainty Matter to Foreign Direct Investment?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(6), pages 471-487, June.
    10. Sophie Therese Schneider & Konstantin M. Wacker, 2022. "Explaining the global landscape of foreign direct investment: Knowledge capital, gravity, and the role of culture and institutions," The World Economy, Wiley Blackwell, vol. 45(10), pages 3080-3108, October.

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    More about this item

    Keywords

    foreign direct investment; financial market devleopment; gravity model; financial market development;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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