FINANCIAL
DEVELOPMENT AND FDI FLOWS: EVIDENCE FROM ADVANCED ECONOMIES
Konstantinos Dellis
University of Piraeus – Bank of Greece
ABSTRACT
Foreign direct
investment (FDI) has grown dramatically as a major form of international
capital transfer over the past decades. This rapid growth in cross border
investment has to a large partbeen due to the reduction in trade and investment
barriers, the harmonization and mutual recognition of regulation and the
removal of domestic impediments through reform and privatization (see OECD,
2001). Amongstthe numerous FDI determinants studied in the literature, the
development anddepth of the financial sector has gained importance during the
last decade. According to the Paradox of
Finance hypothesis, despite the fact that Multinational Corporations (MNCs)
are not locallyfinancially constrained their affiliates interact significantly
with the domestic financial system. Hence, a deep and efficient financial
system should act as a pull factor for FDI flows. Using up-to-date FDI data for
advanced and emerging economies, this research explores the role of previously
unavailable financial variables in attracting FDI flows. The results show that
fostering an efficient financial sector with diversified funding sources for
enterprises contributes to increased participation by Multinational
Corporations in the host economy. This insightful policy implication for
advanced economies is that the restructuring of the financial system can
contribute to economic recovery through the FDI channel as well. Finally, the
results highlight the importance for the full implementation of the Banking
Union and the Capital Markets Union in the EU.
Keywords: Foreign
Direct Investment, Financial Development, Economic Growth, Advanced Economies
JEL Classification: O43, F21, F38, F65, G20
Acknowledgments: I would like to thank the seminar audience in the 2018 ICMAIF
(Department of Economics, University of Crete, May 29th, Rethymnon,
Greece) for their insightful comments. The views expressed in this paper are
those ofthe author and do not necessarily reflect those of the University of
Piraeus and the Bank of Greece.This research was conducted when I was visiting Bank
of Greece on the Bank’s programme of cooperation with universities.
Correspondence:
Kostantinos Dellis
University of
Piraeus
80 str, Karaoli
and Dimitriou,
185 34, Athens
email: kdellis@unipi.com