FDI and Economic Growth —  Does the Quality of Banking Development Matter?

Nor Hakimah Haji Mohd; Soo-Wah Low; Abu Hassan Shaari Md Nor; Noor A. Ghazali

doi:10.22146/gamaijb.5472

FDI and Economic Growth — Does the Quality of Banking Development Matter?

Nor Hakimah Haji Mohd, Soo-Wah Low, Abu Hassan Shaari Md Nor, Noor A. Ghazali

(Submitted 29 November 2014)

(Published 29 September 2014)

Abstract

This study examines the role of banking development quality in the FDI-growth nexus from 1998 to 2009. Banking development quality is measured using two standardized intermediation cost indicators and an index of banking development quality that is constructed based on the following indicators: overhead costs to total assets and net interest margin. The results for developed countries show that, on its own, FDI is negatively related to economic growth. However, when FDI is interacted with a banking development quality index, the quality of banking development is found to play a positive role in influencing the effects of FDI on economic growth. This suggests that the quality of banking development serves as an absorptive capacity that allows developed countries to benefit from the positive growth effects of FDI. On the contrary, for emerging countries, the findings indicate that banking development quality plays no role in influencing the impact of FDI on economic growth. This implies that the quality of banking development in emerging countries has yet to reach a level that allows it to importantly influence the growth effects of FDI.

Full Text: PDF

DOI: 10.22146/gamaijb.5472

References

Alfaro, L., A. Chanda, S. Kalemli-Ozcan, and S. Sayek. 2004. FDI and economic growth: the role of local financial markets. Journal of International Economics 64: 89 –112.

Alfaro, L., S. Kalemli-Ozcan, and S. Sayek. 2009. FDI, productivity and financial development. The World Economy 32 (1): 111–135.

Ang, J. B. 2009a. Financial development and the FDI-growth nexus: the Malaysian experience. Applied Economics 41: 1595–1601.

Ang, J. B. 2009b. Foreign direct investment and its impact on the Thai economy: the role of financial development. Journal of Economics and Finance 33: 316–323.

Azman-Saini, W. N. W., S. H. Law, and A. Abdul Halim. 2010. FDI and economic growth: new evidence of the role of financial markets. Economics Letters 210: 211–213.

Barro, R.J., and J.-W Lee. 2012. A new data set of educational attainment in the world, 1950–2010. Journal of Development Economics. Available from: http://dx.doi.org/10.1016/j.jdeveco.2012.10.001

Beck, T., A. Demirguc-Kunt, and R. Levine. 2010. Financial institutions and markets across countries and over time: the updated financial development and structure database. The World Bank Economic Review 24 (1): 77–92.

Beck, T., and H. Hesse. 2009. Why are interest spreads so high in Uganda? Journal of Development Economics 88: 192–204.

Beck, T., R. Levine, and N. Loayza. 2000. Finance and the Sources of Growth. Journal of Financial Economics 58: 261-300

Beugelsdijk, S., R. Smeets, and R. Zwinkels. 2008. The impact of horizontal and vertical FDI on host’s country economic growth. International Business Review 17: 452–472.

Carkovic, M., and R. Levine. 2002. Does foreign direct investment accelerate economic growth? Working Paper. University of Minnesota Department of Finance.

Choong, C. K. 2012. Does the domestic financial development enhance the linkages between foreign direct investment and economic growth? Empirical Economics 42: 819–834.

Claessens, S., A. Demirguc-Kunt, and H. Huizinga. 2001. How does foreign entry affect domestic banking markets? Journal of Banking and Finance 25: 891–911.

Crespo, N., and M. P. Fontoura. 2007. Determinant factors of FDI spillovers – what do we really know? World Development 35(3): 410–425.

De Mello, Jr., L. R. 1999. Foreign direct investment-led growth: evidence from time series and panel data. Oxford Economic Papers 51: 133–151.

Demirguc-Kunt, A., L. Laeven, and R. Levine. 2004. Regulations, market structure, institutions, and the cost of financial intermediation. Journal of Money, Credit and Banking 36(3): 593–622.

Demirguc-Kunt, A., and V. Maksimovic. 2002. Funding Growth in Bank-based and Market-based Financial System: Evidence from Firm Level Data. Journal of Financial Economics 65: 337-363.

Doytch, N., and M. Uctum. 2011. Does the worldwide shift of FDI from manufacturing to services accelerate economic growth? A GMM estimation study. Journal of International Money and Finance 30: 410–427.

Elia, S., I. Mariotti, and L. Piscitello. 2009. The impact of outward FDI on the home country’s labor demand and skill composition. International Business Review 18: 357–372.

Görg, H., and D. Greenaway. 2004. Much ado about nothing? Do domestic firms really benefit from foreign direct investment? The World Bank Research Observer 19(2): 171–197.

Hasan, I., M. Koetter, and M. Wedow. 2009. Regional growth and finance in Europe: is there a quality effect of bank efficiency? Journal of Banking & Finance 33: 1446–1453.

Hermes, N., and R. Lensink. 2003. Foreign direct investment, financial development and economic growth. The Journal of Development Studies 40(1): 142–163.

Herzer, D., S. Klasen, and D. F. Nowak-Lehmann. 2008. In search of FDI-led growth in developing countries: the way forward. Economic Modelling 25: 793–810.

Jayaratne, J., and P. E. Strahan. 1996. The finance-growth nexus evidence from bank deregulation. The Quarterly Journal of Economics 111(3): 639–670.

Jin, J. Y., Kanagaretnam, K. and Lobo, G. J. 2011. Ability of accounting and audit quality variables to predict bank failure during the financial crisis. Journal of Banking and Finance 35:2811-2819.

Ju, J., and S. J. Wei. 2011. When is quality of financial system a source of comparative advantage? Journal of International Economics 84: 178–187.

King, R. G., and R. Levine. 1993. Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics 108(3): 717–737.

Lee, C. C., and C. P. Chang. 2009. FDI, financial development and economic growth: international evidence. Journal of Applied Economics 12(2): 249–271.

Lensink, R. and Hermes, N. 2004. The short-term effects of foreign bank entry on domestic bank behavior: does economic development matter? Journal of Banking & Finance 28: 55-568.

Levine, R. 2005. Finance and growth: Theory and evidence. In Aghion, P., and S. Durlaff (Eds.), Handbook of Economic Growth. The Netherlands: Elsevier Science.

Levine, R., and S. Zervos. 1998. Stock markets, banks and economic growth. American Economic Review 88 (3): 537–558.

Li, X., and X. Liu. 2005. Foreign direct investment and economic growth: an increasingly endogenous relationship. World Development 33 (3): 393–407.

Moudos, J., and L. Solis. 2009. The determinants of net interest income in the Mexican banking system: an integrated model. Journal of Banking and Finance 33: 1920-1931.

The Chinn-Ito Index. Available from: http://web.pdx.edu/~ito/Chinn-Ito_website.htm.

UNCTAD. 2010. World Investment Report 2010. Investing in a Low-Carbon Economy. New York and Geneva: United Nations.

Vu, T. B., and I. Noy. 2009. Sectoral analysis of foreign direct investment and growth in the developed countries. International Financial Markets, Institutions and Money 19: 402–413.

World Bank, World Databank, World Development Indicators. Available from: http://databank.worldbank.org/ddp/home.do

Yao, S., and K. Wei. 2007. Economic growth in the presence of FDI: the perspective of newly industrializing economies. Journal of Comparative Economics 35: 211–234.

Refbacks

There are currently no refbacks.