The Effects of Financial Development on Foreign Direct Investment

45 Pages Posted: 10 Apr 2017 Last revised: 10 Sep 2021

See all articles by Rodolphe Desbordes

Rodolphe Desbordes

SKEMA Business School

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2017

Abstract

This paper empirically investigates the various effects that source and destination countries’ financial development (SFD and DFD respectively) have on foreign direct investment (FDI).We establish causality by exploiting variations in both country-specific financial development and sector-specific financial vulnerability. This approach is made possible by our use of detailed databases on real manufacturing FDI projects worldwide. We find that both SFD and DFD have a large positive influence on greenfield, expansion, and mergers & acquisitions FDI, by directly increasing access to external finance and indirectly promoting manufacturing activity. The overall economic impacts of SFD and DFD tend to be similar but their direct and indirect effects vary across margins and types of FDI.

Suggested Citation

Desbordes, Rodolphe and Wei, Shang-Jin, The Effects of Financial Development on Foreign Direct Investment (April 2017). NBER Working Paper No. w23309, Available at SSRN: https://ssrn.com/abstract=2949613

Rodolphe Desbordes (Contact Author)

SKEMA Business School ( email )

Lille
France

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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