The Role of Financial Development in the Relationship between Foreign Direct Investment and Economic Growth: A Nonlinear Approach

Financial development is recognized as an absorptive capacity in the relationship between foreign direct investment (FDI) and economic growth. However, existing studies also shows that financial development dampens economic growth through the ‘too much finance’ hypothesis. Hence, there is a question of how far the financial developmentshould be developed to optimize the benefits of FDI on economic growth. Therefore, this study aims to investigate these three variables with considering the nonlinear properties of financial development on economic growth.Interestingly, our results demonstrate that the nonlinear relationship of financial development on economic growth is U-shaped curve by using the recent data period from 2009 until 2013 for 65 developing countries, which is in contrast with the past findings. This implies that financial development accelerate economic growth after it surpassed the threshold point and inherent the positive effect of FDI on economic growth to be realized. Thus, it suggests that the level of financial development needs to be increased as it serves as a form of absorptive capacity that enables the positive growth effects of FDI in the recipient countries

کلیدواژه ها:

Financial Development ، Foreign Direct Investment ، Economic Growth ، Nonlinear ، Absorptive Capacity