Existing studies find that the nonlinear relationship between financial development and economic growth is inverted U-shaped or there exist Kuznets curve, where financial development harm growth after surpassed the threshold point. The objective of this study is to re-estimate the existing relationship between financial development and economic growth for 65 developing countries for the period post 2007-2008 Global Financial Crisis starts from 2009-2015 using Generalized Method-of-Moment (GMM). Three financial development indicators namely, domestic credit to private sector (DCPS), liquid liabilities (LL) and private credit to deposit money (PCDM) are used in this study. However, our findings are contrary to the previous study. Interestingly, our result shows that the nonlinear relationship between financial development and economic growth is U-shaped for all indicators. In other words, financial development accelerated economic growth after reaching the turning point. The results of U-test of Lind and Mehlum (2010) confirms that the U-shaped relationship exist. It shows that the higher financial development enhance the performance of economic growth. Thus, our results challenge the previous findings and recommend for policy review.

Financial development is recognized as an absorptive capacity in the relationship between foreign direct investment (FDI) and economic growth. Therefore, FDI effect on economic growth is contingent with the level of financial development. However, existing studies also show that financial development dampens economic growth through the “too much finance harms economic growth” hypothesis. Hence, there is a question of how far financial development should be developed to optimize the benefits of FDI on economic growth. The novelty of this study is that it reexamines the role of financial development in FDI-growth relationship by including the interaction term between FDI and the nonlinearity of financial development on economic growth in the period following the 2007–2008 Global Financial Crisis. Interestingly, our results demonstrate that the nonlinear relationship of financial development on economic growth is a U-shaped curve by using data from the 2009–2013 period, for 65 developing countries, which contrast the findings from previous studies. The absorptive capacity effects work nonlinearly, in that FDI accelerates growth after reaching a certain level of financial development, and that the positive effect originates from a minimum level. The study thus suggests that the level of financial development needs to be increased since it serves as a form of absorptive capacity enabling the positive growth effects of FDI in the recipient countries.

This paper investigates the impact of the financial development on foreign direct investment (FDI) inflows in ASEAN-5 countries over the period of 1980-2013. The 5 countries included in this study are Malaysia, Thailand, Indonesia, Singapore and Philippines. In the model, financial development, consumer price index (CPI) and real gross domestic product (GDP) per capita are the independent variables. The stationarity of the variables is examined through both first-and second-generation unit root tests with the cross-sectional dependence among countries. The Pedroni and Westerlund cointegration tests results show the existence of long run relationship among the variables. Long term coefficients are estimated using Fully Modified Ordinary Least Square (FMOLS) model and it reveals that financial development has a nonlinear relation with FDI. When financial development passes the threshold point at above 70 point, it will benefit the FDI. Furthermore, the Panel Vector Error Correction Model (VECM) is applied to examine the causality relationship among the associated variables. The causality analysis confirms the presence of both long

This chapter examines the role of financial development on foreign direct investment (FDI) inflows in ASEAN-5 countries over the period of 1980-2017. The ASEAN-5 countries include Malaysia, Thailand, Indonesia, Singapore, and the Philippines. The panel cointegration of second generation is used in order to address the existence of economic integration among ASEAN-5 as proven in cross-sectional dependency test. The results from fully modified ordinary least square (FMOLS) and cross-sectional dependency autoregressive distributed lag (CS-ARDL) consistently shows that the financial development has a nonlinear relationship with FDI of U-shape, whereby the financial development will benefit the FDI after it beyond the threshold point at 70% of total GDP. Investors will make decision based on the financial status as shown in the financial accounting report, whereby the quality of financial accounting representing transparent information that leads on reducing asymmetric information between investor and the financial institutions in host countries. In addition, the causality analysis based on panel vector error correction model (VECM) confirms the presence of both long-run relationship and short-run dynamic among FDI, financial development, consumer price index, and real gross domestic product per capita.

This study investigates the effects of financial development in enabling foreign direct investment to promote economic growth. A sample of 65 developing countries is examined over the period of 2009 to 2015 with the dynamic panel estimation by using Generalized Method of Moment (GMM). Financial development is measured using three financial indicators and an index of financial development is constructed based on the following indicators: domestic credit to private sector, liquid liabilities and private credit by banks. The results demonstrate that the financial development index contributes positively and higher than each financial development proxy in influencing the effects of FDI on economic growth. However, FDI influence negative effect in the group of countries of low level of financial development. Thus, it suggests that financial development need to be increased and serves as a form of absorptive capacity that enable the positive growth effects of FDI in the recipient countries.