FOREIGN DIRECT INVESTMENT, FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN KEY EMERGING MARKETS

Abstract

This paper investigated the impact of foreign direct investment on economic growth and the role of financial development in absorbing the positive effects of foreign direct investment in key emerging markets using the fixed and random effects regression models. The study analysed data from twenty-four emerging markets from 1990 to 2018. The empirical results revealed that foreign direct investment was a major driver of growth in the emerging markets as the coefficient of FDI was positively and significantly related to economic growth in the emerging markets. The results further showed that financial development and an interaction term between FDI and financial development had negative influence on growth in the emerging markets. The paper recommended that governments should make effort to formulate and implement investment friendly policies in the emerging markets to attract high inflows of FDI. The paper further recommended that governments in the emerging markets should strive to formulate and implement financial development policies capable of promoting economic growth and development.