Financial foreign direct investment and the economic performance of developing countries

Abstract

I investigate whether developed countries' financial foreign direct investment (FDI) has an indirect impact on the economic performance of developing countries' manufacturing sectors by influencing local financial financing conditions. I combine an interaction approach exploiting sector‐specific financial dependence with a “gravity‐based” instrumental variable strategy to detect a potential “access to external finance” effect. I find that higher greenfield FDI in local retail banking, but not in other financial functions, leads to better economic performance of the manufacturing sectors typically dependent on external finance during the period 2002–2014.

Domestic capital vs. foreign capital new enterprise creation: the case of FDI in India

“…There are empirical evidences that FDI crowds out domestic investment (Apergis et al, 2006). A study by Desbordes (2022) for the period of 2002-2014, shows that FDI in the retail banking sector of developing countries is associated with better relative economic performance of externally financially dependent manufacturing sectors. This happens because the entry of foreign financial institutions increases local financial development and in doing so, fosters economic growth of the host country.…”