Causality between FDI and Financial Market Development: Evidence from Emerging Markets

World Bank Economic Review (Forthcoming)

36 Pages Posted: 27 May 2011 Last revised: 15 May 2015

Date Written: February 1, 2014

Abstract

This paper studies the causal relationship between foreign direct investment (FDI) and financial market development (FMD) using panel data from emerging markets. Most studies of the relationship between FDI and FMD have focused on the role of FMD in the link between FDI and economic growth, with no deep understanding of direct causality between FDI and FMD, especially in emerging markets, where financial markets are in the development stage. We document bidirectional causality between FDI and stock market development indicators. For banking sector development indicators, the relationship is ambiguous and inconclusive. Care is therefore needed when analysing the relationship between FMD and FDI, as results may depend on whether the FMD variables used to evaluate causality are stock market or banking sector development indicators.

Keywords: Foreign direct investment, FDI, financial market development, stock market development, banking sector development, causality

JEL Classification: F21, O16

Suggested Citation

Soumaré, Issouf and Tchana, Fulbert Tchana, Causality between FDI and Financial Market Development: Evidence from Emerging Markets (February 1, 2014). World Bank Economic Review (Forthcoming). Available at SSRN: https://ssrn.com/abstract=1852168 or http://dx.doi.org/10.2139/ssrn.1852168

Issouf Soumaré (Contact Author)

Laval University ( email )

Faculty of Business Administration
Department of Finance, Insurance and Real Estate
Quebec, Quebec G1V 0A6
Canada
1418 656 3423 (Phone)
1418 656 2624 (Fax)

Fulbert Tchana Tchana

Ministry of Finance, Quebec ( email )

12 Saint-Louis
QUEBEC, Quebec G1R5L3
Canada

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