FDI and Economic Growth: The Role of Local Financial Markets

Laura Alfaro, Areendam Chanda, Sebnem Kalemli-Ozcan and Selin Sayek , Journal of International Economics 64(1) , 89-112 , October 2004.

In this paper, we examine the various links among foreign direct investment (FDI), financial markets, and economic growth. We explore whether countries with better financial systems can exploit FDI more efficiently. Empirical analysis, using cross-country data between 1975-1995, shows that FDI alone plays an ambiguous role in contributing to economic growth. However, countries with well-developed financial markets gain significantly from FDI. The results are robust to different measures of financial market development, the inclusion of other determinants of economic growth, and consideration of endogeneity. 

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