The effect of Foreign direct investment and financial development on economic growth: Evidence from global income countries

Abstract

Prior researchers have explored the role of FDI and economic growth or financial development and economic growth in a particular sample of countries or region while no collective studies on the effect of FDI, banks and stock market on economic growth in region or income-based groups have been conducted yet. Using a balanced panel data set of the globe of 193 upper middle income (UMI), lower middle income (LMI) and high income (HMI) countries for the period of 1998 to 2018, the study ever the first time explore the role of FDI, banks and stock markets financial development on economic growth by employing static methods and Dynamic approaches which contributes to the scarce literature on the collective and across income-based groups of countries. All model findings for the global panel indicates that FDI affect economic growth significantly and positively in the global panel, lower middle income (LMI) and upper middle income (UMI) countries where it’s not true for high income (HI) countries. Banking sector development also affect economic growth significantly but negatively in the global panel, high income and upper middle-income countries while not significant for the lower middle income (LMI) countries. Stock market development also affects economic growth significantly but negatively in the global panel. Furthermore, the result concludes that FDI have a larger effect on economic growth than does banks or stock market financial development. This study suggest high income countries regards improving FDI attraction, lower middle income (LMI) countries in regards improve banking sector and collectively suggest to improve major driver and functioning of banking sector and stock markets to spur economic growth. This study is beneficial for the government channels and financial sector of the study countries to make further decision.