The Effect of Financial Development on Foreign Direct Investment


1 Department of Economics, Science & Research Branch, Islamic Azad University, Tehran, Iran.

2 Department of Economics, Allameh Tabataba'i University, Tehran, Iran.

3 Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran.

4 Department of Economics, South Tehran Branch, Islamic Azad University, Tehran, Iran.


The relationship between financial development indexes and foreign direct investment is studied in this paper. The main objective is to examine the effects of financial development indicators in two groups (the financial markets index and the financial institution index) on the FDI absorption rate. The effects of these indicators have been evaluated in the form of a panel data model for 11 countries including (Saudi Arabia, Argentina, Sweden, Poland, Belgium, Iran, Thailand, Nigeria,  Austria,  Norway, and  Venezuela) in the period 1990 to 2014. The results show that when the financial institutional index including (FID, FIE), financial market index including (FMD), GDP & DCP increase the FDI increases, and when FIA, FMA & FME increase, the FDI decreases. So Expanding the capital market will increase FDI attraction in selected countries, and for countries with weak capital markets, the financial market access index and the financial institution efficiency index has a significant negative effect on FDI absorption and vice versa.


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