Foreign direct investment, financial development and economic growth

FDI may help to raise economic growth in recipient countries. Yet, the
contribution FDI can make may strongly depend on the circumstances in the
recipient countries. This paper argues that the development of the financial
system of the recipient country is an important precondition for FDI to have a
positive impact on economic growth. A more developed financial system
positively contributes to the process of technological diffusion associated with
FDI. The paper empirically investigates the role the development of the
financial system plays in enhancing the positive relationship between FDI and
economic growth. The empirical investigation presented in the paper strongly
suggests that this is the case. Of the 67 countries in data set, 37 have a
sufficiently developed financial system in order to let FDI contribute positively
to economic growth. Most of these countries are in Latin America and Asia.

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