The effects of financial development on foreign direct investment

Rodolphe Desbordes; Shang Jin Wei

doi:10.1016/j.jdeveco.2017.02.008

The effects of financial development on foreign direct investment

Rodolphe Desbordes^*, Shang Jin Wei

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

162 Citations (Scopus)

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.

Original language	English
Pages (from-to)	153-168
Number of pages	16
Journal	Journal of Development Economics
Volume	127
DOIs	https://doi.org/10.1016/j.jdeveco.2017.02.008
Publication status	Published - 1 Jul 2017
Externally published	Yes

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title = "The effects of financial development on foreign direct investment",

abstract = "This paper empirically investigates the various effects that source and destination countries{\textquoteright} 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.",

keywords = "Financial constraints, Financial development, Foreign direct investment, Greenfield, Mergers and acquisitions",

author = "Rodolphe Desbordes and Wei, {Shang Jin}",

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year = "2017",

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AU - Wei, Shang Jin

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Y1 - 2017/7/1

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AB - 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.

KW - Financial constraints

KW - Financial development

KW - Foreign direct investment

KW - Greenfield

KW - Mergers and acquisitions

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VL - 127

SP - 153

EP - 168

JO - Journal of Development Economics

JF - Journal of Development Economics

ER -

The effects of financial development on foreign direct investment

Abstract

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