Financial Inclusion′s Adaptive Common Correlated Effects on Foreign Direct Investment

Stacy Loeb^*
*Correspondence: Stacy Loeb, Department of Population Health, New York University, New York, NY, USA, Email:

Introduction

The purpose of this study is to demonstrate how financial liberalisation, as a factor in financial development, can promote the link between FDI and economic growth. There have been two distinct components examined. First, using an endogenous growth model, we attempted to analyse the relationship between financial development, internal financial liberalisation, and FDI. The second element consists of an empirical investigation that attempted to confirm the previously stated theoretical relationship using panel data. The poll, which included a sample of 69 industrialised and developing countries, allowed us to arrive at three key conclusions. First, we have seen that FDIs had a negative impact on GDP growth per capita when financial institutions are not liberalised. In nations with a robust financial sector, FDI implementation has a favourable impact on economic growth. This suggests that the degree of finance system liberalisation is the main factor affecting how effective FDI is. As a result, the effects of FDI on growth in no liberalized financial systems are contested. Third, we demonstrated that financial development level is a strategic factor that influences growth in a favourable way [1].

Several theoretical and empirical researches have examined the role of foreign direct investment (FDI) in economic growth. This is primarily explained by the idea that FDI is a powerful tool for transferring technology from industrialised to underdeveloped nations. In other words, foreign direct investment (FDI) is typically seen as a valuable resource to support industrial development in the host country, particularly in developing countries. Additionally, once established, FDI can have a favourable impact on host countries' competitiveness, productivity, and job creation. The influence of FDI is seen not only in the cash contributions made to the host nation, but also in the provision of technology, know-how, and the ability to enter new markets. FDI may actively contribute to economic growth and development as a result of spillover effects that occur at various levels [2].

However, it should be highlighted that the majority of FDI research are based on microeconomic theories. These studies have mostly concentrated on the communication pathways through which FDI may influence economic development in host nations. According to their research it has been demonstrated that the inefficiency of some economic policies in luring FDI is entirely dependent on two key variables: the degree of economic growth of the host nation and the calibre of its business climate. Indeed, creating more effective economic institutions and policies was necessary as a result of financial market globalisation and the obligations that developing nations faced to participate in it. Therefore, the primary challenge facing economic policymakers is how to create mechanisms that would allow the entire economy to draw the most anticipated advantages (which are typically tied to FDI) and lead to economic growth [3].

This subject was addressed in the UNCTAD report on trade and the determinants of FDI, which identified three key elements that affect a nation's capacity to draw FDI flows. These aspects are primarily of a political, economic, and environmental character (such as economic and political stability, etc). The degree of trade liberalisation in the host country. Foreign investors are reportedly looking for markets, resources, and efficiency, according to the study. As a result, empirical studies that initially concentrated on microeconomic factors to determine FDI in rich and developing nations have been revised since the publication of this report to also incorporate macroeconomic and institutional aspects. As a result, we will concentrate on how FDI (financial liberalisation) affects economic growth in our study. We shall examine the theoretical features of the relationship between financial liberalisation and FDI in the second section in order to answer our problem and this spectrum of difficulties. The third one will be looked at to investigate how financial liberalisation and growth are related. The data and sample will be presented in the fourth section. The fifth section will seek to interpret the empirical findings, and the final section will attempt to summarise the paper's primary findings [4].

Discussion

Financial liberalisation, which determines how financial sectors evolve, is a necessary but insufficient precondition for promoting investment in new technologies and technical advancement. In other words, risks related to updating both old and new technologies will be diminished as long as the local financial sector continues to grow. Foreign businesses can borrow thanks to the growth of the local financial industry in order to expand their creative activities in the host nation. This could result in more technical externalities for nearby businesses [5].

The accessibility and calibre of domestic financial services may have an impact on FDI and the spread of technology in the host nation. When the financial sectors of the host nation are more developed, this diffusion approach may be more suitable. Once established in the host nation, this enables the multinational company to boost its investments.

Furthermore, strong financial sectors support local contractors' operations while assuring the adoption of new technologies that are comparable to those presented by foreign companies. It would be reasonable to state that the involvement of financial intermediaries is crucial in this situation since they have a beneficial impact on the rate of technological innovation, which boosts economic growth the development of financial intermediation will play a significant role in enhancing FDI flows. In other words, a financial system that is operating properly will reduce or even eliminate the expenses associated with transactions in the financial markets, which will help the spread of technology. The soundness of domestic financial institutions can encourage FDI and help the host country experience favourable effects (technology diffusion, efficiency, etc.). This indicates that FDI and domestic financial markets are closely related. Their study focused on the function of financial intermediaries and demonstrated how the underdevelopment of local financial systems might.

Empirically, we observe that little research have examined the effects of interest-rate liberalisation on financial deepening and the effects of financial liberalisation in general. For instance, Mosley (1999) looked at how access to rural finance affected the effects of financial liberalisation in a number of developing nations. The author showed that the impact of financial sector reforms on financial deepening (measured by M2 and bank deposits as a percentage of GDP) varies between countries. The author came to the conclusion that Malawi's financial depth had somewhat decreased and Madagascar's had undergone minimal changes. Tanzania saw a severe reduction in its financial stability in the second half of the 1980s, but it has recovered nearly half of that decline in the first half of the current century.

Conclusion

The financial system, however, remained extremely unstable and underdeveloped. The changes in Zambia have not been able to stop the country's on-going decline and quickening financial deterioration, which started in the first part of the 1980s. In order to test the hypothesis that the size of the financial system is not a component of economic growth in periods previous to financial reforms, modified the M2/GDP variable by including the role of financial liberalisation (especially in repressed financial systems). To finally produce a new variable, [DREF Ln (M2/GDP)], they attempted to interact the M2/GDP variable with a dummy variable (rated DREF), which takes the value 1 for the period prior to the reform and 0 for the post-reform period.

Acknowledgement

None.

Conflict of Interest

None.

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