The Effects of Financial Development on Foreign Direct Investment

Desbordes, Rodolphe ; Wei, Shang-Jin

World Bank Group, Washington, DC

关键词: ACCESS TO CAPITAL;    ACCESS TO DEBT FINANCING;    ACCESS TO EXTERNAL FINANCE;    ACCESSIBILITY;    ACCOUNTING;   

DOI  :  10.1596/1813-9450-7065
RP-ID  :  WPS7065

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

This paper examines how financialdevelopment influences foreign direct investment. The directand indirect sector-specific effects that sourcecountries' financial development and destinationcountries' financial development can have on foreigndirect investment are first identified in a conceptualframework. The presence and relative strength of thesevarious channels of influence at the different margins offoreign direct investment are then empirically investigatedusing unique and underexploited sector-specific bilateralpanel data on greenfield foreign direct investment over theperiod 2003-2006. Causality is established by applying adifference-in-differences approach that exploits thevariation in financial vulnerability across manufacturingsectors. The overall effects of higher sourcecountries' financial development and destinationcountries' financial development on the relative volumeof bilateral foreign direct investment in financiallyvulnerable sectors are large, positive, and complementary.These effects appear to operate mainly at the intensivemargin rather than at the extensive margin of foreign directinvestment. There is also evidence of direct and indirecteffects of financial development. The key findings arerobust to the use of data on the number of bilateralMergers\&Acquisitions transactions. Overall, theempirical results unambiguously indicate that asophisticated and well-functioning financial system insource and destination countries greatly facilitates theinternational expansion of firms through foreign directinvestment, especially in financially vulnerable sectors.