Foreign Direct Investment in the Financial Sector and Economic Growth in Central and Eastern Europe: The Crucial Role of the Efficiency Channel
Posted: 19 Dec 2008
Date Written: 2006
We examine the impact of financial sector FDI (FSFDI) on economic growth via the efficiency channel. We estimate a panel data model for 11 Central and Eastern European countries in a cross-country growth accounting framework over 1996 to 2003. We find a hump-shaped impact of FSFDI on economic growth. Medium FSFDI supports growth if human capital suffices. Above a certain threshold, crowding-out of local physical capital via foreign bank entry slows growth. We combine the FDI-growth and the finance-growth-literature and conclude that the level and quality of foreign investment influences the financial sectors' contribution to growth in emerging markets.
Keywords: Financial sector foreign direct investment, Economic growth, Financial economics, Emerging markets, Panel data analysis
JEL Classification: C23, F36, G10, O16, P2
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