The
impact of
FDI and
Financial
markets
on
growth
[2012]
We analyze the link between FDI, financial markets and economic
growth for the period 1990-2010. By analyzing variables relating to
a country’s credit and stock market, we assess the impact of financial
markets on growth. Our results suggest that stock markets trigger
growth, while credit markets do not.
Comparing
OECD- with
Latin American
economies
Table of Contents
1.
Introduction ..................................................................................................................................... 3
2.
Empirical review .............................................................................................................................. 4
3.
2.1
The effects of FDI on economic growth .................................................................................. 4
2.2
The effects of financial markets on growth............................................................................. 5
Empirical estimation ........................................................................................................................ 6
3.1
Data ......................................................................................................................................... 6
3.1.1
3.2
4.
Descriptive statistics ........................................................................................................ 8
Methodology ........................................................................................................................... 9
Results ........................................................................................................................................... 11
4.1
The impact of FDI and financial markets on growth ............................................................. 11
4.2
Controlling for endogeneity .................................................................................................. 14
4.3
Limitations and recommendations ....................................................................................... 15
5.
Conclusion ..................................................................................................................................... 17
6.
Literature list ................................................................................................................................. 19
7.
Appendix........................................................................................................................................ 21
7.1
Dataset of countries .............................................................................................................. 21
7.2
Multicollinearity .................................................................................................................... 22
2
1. Introduction
Foreign direct investment (FDI) has been a hot topic for many years. Theory suggests that FDI is
characterized as a supplement for low domestic saving rates, and that the inflow of these foreign
capitals trigger economic growth. These foreign capital inflows will also cause a rise in domestic
productivity, which in turn will lead to a higher level of economic activity and growth. According to
the government of Australia, FDI also raises household income, since it creates new job
opportunities- higher household income also leads to higher economic activity and growth.
In addition to investigating the impact of FDI on growth, this paper also tests the link between
financial markets and growth. The recent financial crisis has put financial markets in the spot light,
highlighting how they are interconnected with one another. Advanced economies have proper credit
and stock markets, while emerging and less-developed economies do not have a proper financial
market in place yet. One of the regions which benefitted largely from FDI inflow recently has been
Latin America, as has been suggested by Rivera-Batiz (2003). However, Latin American countries do
not have well-developed financial systems in place, which can limit the impact of FDI on growth.
According to the IMF (2007), financial markets positively affect economic development, as has been
the case for OECD-countries. Therefore, our paper studies this link by focusing on the following
question, ‘Does the impact of FDI and financial markets differ between OECD and Latin American
countries?’ By comparing these two groups of countries, we attempt to give a brief conclusion on
how financial market and FDI affect growth.
This paper is divided into different sections. Section 2 discuses the most influential findings in the
literature and compares the results, after which section 3 focuses on our dataset and on our
estimations. Section 4 discuses our main findings, while concluding remarks will be presented in
section 5.
3
2. Empirical review
This section covers some of the most influential findings in the literature. We start by looking at
some findings relating to the impact of FDI on growth, after which we discuss the impact of financial
markets on growth. The World Bank classifies FDI as the sum of foreign capital investments, as
percentage of a country’s GDP, if these foreign investments are meant to obtain a lasting
management interest of at least 10%.
2.1 The effects of FDI on economic growth
We start by analyzing the findings of Borenzstein et al. (1998). They study the impact of foreign direct
investment on growth, based on data of 69 less developed economies covering the period 19701998, and they reported that FDI promotes technology transfers amongst countries. Also, Bengoa
and Sanches-Robles (2003) report that FDI positively affect growth for Latin American countries, by
using a two-step approach. First, they test the link between economic freedom and FDI inflow, after
which they test for the link between FDI inflow and growth. Also relating to the impact of FDI in Latin
American countries are the findings of Bosworth and Collins (1999). They documented that FDI
positively affects economic development- their models were based on cross-country data. In
addition, Barel and Pain (1999) documented the positive impact of FDI on economic development.
Their analysis was based on four European countries receiving foreign investments originating from
the USA. Furthermore, Balasubramanyam et al.’s findings (1996) also support the notion that foreign
direct investments trigger economic growth. However, for FDI to positively affect growth, countries
should have exceeded a threshold level of human capital, as has been proposed by Keller (1996).
Similar results have been documented by Xu (2000). The findings of Blalock and Gertler (2005)
suggest that FDI facilitates the transfer of technology from developed countries to developing
countries. In addition to meeting a minimum threshold level of human endowment, countries should
also invest in their social capacity. This has been proposed by Abramovitz’s findings (1986), where he
suggested that the term social capacity represents economic stability, human capital and
4
infrastructure. By providing proper infrastructure, governments can convince multinational to invest
in their economy.
On the other hand, the findings of Bos et al. (1974) suggest that FDI negatively affects growth. They
studied FDI flows relating to the US market and documented a negative link between FDI and growth.
Similar conclusions have been proposed by Prebisch (1968). As the findings in the literature suggest,
the impact of FDI on growth is not exactly clear and straightforward.
2.2 The effects of financial markets on growth
One of the other topics which have been thoroughly analyzed is the impact of financial markets on
growth. Some influential findings are the works by Grossman and Miller (1988), where they reported
that financial markets positively affect economic development. King and Levine (1993) reported
similar findings, suggesting that financial markets are significant on growth. Some authors
documented that financial markets revolve around three aspects. Firstly, financial markets and
financial intermediaries often disclose information regarding investment opportunities. This has been
proposed by the findings of Kashyap et al. (1998). Financial intermediaries can provide this
information at lower costs, which leads to more economic activity. Secondly, financial markets
promote corporate governance on behalf of investors. Dow and Gordon (1997) suggest that financial
markets can provide a culture to cultivate proper corporate governance. Finally, financial markets
also perform risk management through diversification. Acemoglu and Zilibotti (1997) reported that
diversification of risk leads to lower risk, which also promote economic growth. Lower risk promotes
more economic activity which will lead to higher economic growth rates. Villegas-Sanches (2009)
reported that FDI exert economic growth only if the host country has a well-developed financial
market in place.
Also, Neusser and Kugler (1998) studied the impact of financial markets on growth for OECD
countries, and reported that financial markets positively affect growth. To test this link, they use a
5
granger causality test based on time series observations. Shabbier (1997) also tested the link
between financial markets and growth and documented that well-developed financial markets
promote growth. More specifically, Scott-Baier and Dwyer analyzed the impact of introducing a stock
market, and reported that introducing a stock market into the economy positively affects economic
development. However, Azman-Saini et al. (2010) documented that for FDI to have a positive impact
on growth, countries’ financial markets should exceed a threshold level.
3. Empirical estimation
3.1 Data
To test the link between FDI, financial markets and growth, we have constructed a cross-section
database. This section thoroughly discuses our dataset and the databases we have used to obtain our
dataset.
We have collected data reporting annual GDP growth rates from the World Development Indicators
(WDI) over the period 1990 to 2010. Data on one of our main variables, which is the net inflow of
foreign direct investments, have been obtained from the World Bank.
Analyzing countries’ financial markets is an extremely complicated mission, since there is no one
particular method of measuring this. Luckily, by analyzing different characteristics of a country’s
financial market, our models are able to gain better insight into the link between financial markets
and growth. Theory suggests that financial markets can be divided into credit markets and stock
markets. These two submarkets however, are closely linked with one another. Fortunately, the
World Bank Financial Structure Database collects data on several variables explaining the working of
the credit and the stock market. Our models include two variables explaining the work of the credit
market, and two variables relating to the work of the stock market.
6
We start by introducing our first variable relating to the working of the credit market, which is the
Liquid liabilities of the financial market over GDP. This is denoted as LL throughout our models.
According to the World Bank Financial Structure Database, this variable relates to the sum of all
currency in circulation plus any interest-bearing liabilities of commercial banks and financial
intermediaries. As Alfarro et al. (2004) suggest that the variable LL provides a loose measure of the
overall credit market size in an economy. Our second variable used as proxy for the credit market
variable is the total amount of private credit which is available in an economy. The official variable’s
name is the Private credit by deposit money banks and other financial institutions over GDP, as is
denoted as PC throughout our models. Levine et al. (2000) suggest that this variable assesses a
country’s banking sector efficiency, while Beck (2000) reported that countries with higher amount of
private credit will also experience higher growth rates.
The first variable relating to the stock market which we include in our models is the Total value of
stocks traded on the stock market over GDP, which will be denoted as TVS throughout our analysis.
This variable measures the overall size of a country’s stock market. The second variable relating to
the stock market is a country’s Stock market turnover ratio, denoted as SMT throughout our analysis.
Also, our models control for several factors which also affect growth. Our models control for initial
GDP per capita values, since this also affects growth rates. Initial GDP per capita has been measured
as the log of constant 2000 US Dollar. Openness to trade has also been included in our models, since
the findings of Baldwin (2003) suggest that openness to trade positively affect economic
development. Inflation rates are also included in our models, as these proxy government abilities to
stir an economy. Higher prices diminish the purchasing power of agents in the economy, which will
harm economic development. We also include population growth rates, central government’s
expenditure as percentage of GDP and domestic investment rates as additional control variables.
Data on GDP per capita, trade openness, inflation rates, population growth, government expenditure
and domestic growth rates have been obtained from the WDI. Moreover, we have also included a
7
Latin American dummy in our models to compare the impact of financial market on growth between
OECD and Latin American countries. Finally, our models also account for the impact of education on
growth. Barro (1997) documented that education positively affects economic development, which is
why we also account for this. The average years of schooling has been used as a proxy for measuring
education levels, and data has been obtained from the Barro-Lee database.
3.1.1 Descriptive statistics
We start our analysis by looking at the distribution of our data. Table 1 reports the results of our
descriptive statistics. Our results indicate that net FDI inflow and inflation rates show the most
fluctuations in our dataset, since their standard deviations compared to their respective means are
the largest. The country with the lowest and the highest net FDI inflow are Japan and Luxembourg,
with values of 0.10% and 214.79%, respectively. Also, Brazil and Japan experienced the highest and
the lowest inflation rates during the period 1990-2010, with values of 530.21% and 0.58%
respectively. As our results suggest, Portugal and Finland had the lowest and the highest GDP per
capita values in 1990, respectively. Moreover, we also conduct a correlation test on our data. The
results are reported in table 2.
Table 1: Descriptive statistics
Mean
Sd
Min
Max
Median
N
Growth
2,018
0,962
0,61
5,61
1,86
44
GDP
8,963
1,101
6,77
10,42
9,255
44
FDI
7,824
32,027
0,1
214,79
2,545
44
PC
0,45
0,211
0,1
0,95
0,49
41
LL
0,454
0,204
0,2
1,13
0,43
41
TV
0,261
0,209
0,01
0,79
0,215
30
SMT
0,418
0,226
0,02
1,04
0,42
32
Trade
71,092
40,379
20
229,69
61,9
44
Inflation
36,071
109,504
0,58
530,21
4,07
44
Population
1,111
0,76
-0,19
2,91
1,02
44
Government
16,524
5,307
5,95
27,79
16,105
44
Education
2,135
0,358
0,97
2,63
2,23
44
Investment
21,384
3,516
15,4
33,27
21,115
44
The variables Growth, FDI, Trade, Inflation, Population, Government and Investments are all measured in
percentages, while the variables GDP, Education, PC, LL, TV and SMT are all measured as ln(1+’value’).
8
Table 2: Correlation matrix
Growth
GDP
FDI
PC
LL
TV
SMT
Trade
Inflation
Population
Government
Education
Investment
Growth
1,000
0,155
0,206
0,014
0,02
0,275
0.406**
0.427***
-0,170
0,053
-0,104
0,097
0,204
GDP
FDI
PC
LL
TV
SMT
Trade
Inflation
Population GovernmentEducation Investment
1,000
-0,101
0,105
0,003
0,002
0,069
0,017
-0,059
-0,148
0,199
0.278*
0,003
1,000
0,060
0.457***
-0,225
-0.345*
0.646***
-0,053
0,035
0,004
-0,057
0,045
1,000
0.832***
0.405**
0,252
0,035
-0.679***
-0.485***
0.468***
0.361**
0,163
1,000
0,117
-0,054
0.261*
-0.529***
-0.371**
0.298*
0.300*
0.274*
1,000
0.757***
-0,160
-.0308*
-0.359*
0.334*
0.513***
0,009
1,000
-0,280
-0,209
-0,248
0,155
0.308*
0,242
1,000
-0.299**
0,068
0,129
0,014
0,223
1,000
0,157
-0,163
-0,129
-0,187
1,000
-0.449*** 1,000
-0.380** 0.450***
-0,063
-0,048
1,000
0,076
1,000
*, ** and ***Indicate significance levels of 10%, 5% and 1%, respectively
3.2 Methodology
This section covers the methodology used throughout our analysis. We start by plotting the financial
variables on average GDP per capita growth rates over the period 1990-2010. Figure 1 illustrates the
relationship between financial variables and GDP growth. The results suggest that LL does not appear
to have a clear relationship, while PC, SMT and TV could have a positive relationship with growth.
However, in order to be able to verify this link, econometric estimations are executed.
6
6
5
5
GDP growth ( in %)
GDP growth ( in %)
Figure 1: scatter plots financial markets and growth 1990-2010
4
3
2
1
0
4
3
2
1
0
0.00
0.20
0.40
0.60
0.80
1.00
0.00
0.20
Private Credit
0.60
0.80
1.00
1.20
Liquid Liabilities
6
6
GDP growth ( in %)
5
GDP growth (in %)
0.40
4
3
2
1
5
4
3
2
1
0
0
0.00
0.20
0.40
0.60
0.80
1.00
0.00
1.20
0.20
0.40
0.60
Stock Market traded value
Stock market turnover ratio
Source: own estimations
9
0.80
1.00
To empirically assess the link between FDI, financial markets and growth, we calculated averages for
each variable over the period 1980-2010. By using averages, we follow a similar approach as Alfarro
et al. (2004) and King and Levine (1993). Based on these averages, we test the following estimation:
𝐺𝑅𝑂𝑊𝑇𝐻𝑖 = 𝛽0 + 𝛽1 𝐺𝐷𝑃𝑖 + 𝛽2 𝐹𝐷𝐼𝑖 + 𝛽3 𝑓𝑖𝑛𝑎𝑛𝑐𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡𝑠𝑖 + 𝛽4 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖 + 𝜀𝑖 ,
where Growth denotes average GDP growth over the period 1990-2010, FDI denotes net FDI inflow,
Financial Market denotes a variable relating to a specific working of the financial market, while GDP
represents initial GDP per capita values in 1990 and Control denotes a vector of control variables.
One of our control variables, trade, represents a country’s openness to trade, whereas inflation and
population represents a country’s inflation rates and a country’s population growth, respectively.
Government denotes central government’s consumption, whereas education denotes a country’s
level of human capital, and investment represent domestic investment rates. Finally, LA represents
our Latin American dummy, while i denotes countries in our models.
Based on previous findings in the literature, we expect FDI, Financial Market, trade and education to
positively affect growth, while initial GDP per capita, inflation rates, population growth and
government consumption are expected to negatively affect growth. Finally, domestic investment
rates are also expected to positively affect growth. However, our models may be biased due to
endogeneity issues. Financial markets and FDI affect growth, while economic growth also affects
financial markets and net FDI inflow. To correct for this issue, we implement an instrumental variable
test to assess the validity of our models. We use FDI values of 1989 as instruments when performing
our instrumental variable tests.
10
4. Results
4.1 The impact of FDI and financial markets on growth
This section covers the results of our estimations. We start by looking at the results of the impact of
FDI and financial markets on growth, afterwards we will re-examine our models by controlling for any
endogeneity issues.
Table 3: Determinants on GDP growth over 1990-2010
GDP
FDI
Liquid Liabilities
Trade
Inflation
Population
Government
Education
Investment
LA
No. of observation
R²
1
0,132
-0,001
-0,567
0,011**
-0,005
2
0,142
-0,002
-0,517
0,012**
-0,012
-0,065
-0,041
3
-0,024
-0,004
-1,034
0,015**
-0,008
-0,040
-0,067*
0,327
0,037
-1,142**
41
0,2173
41
0,2507
41
0,3821
All of our models include a constant term. *, ** and ***Indicate significance levels of 10%, 5% and 1%,
respectively
Table 3 reports the results of FDI and LL on growth. We first start by analyzing the impact of LL and
FDI on growth in model 1, while only controlling for a country’s openness to trade and inflation rates.
Model 1 is based on 41 observations and covers the period 1990-2010. We expand model 1 by
introducing some additional control variables. The results are presented in model 2, which also
suggest that only trade is significant on growth- it also has the expected sign. Moreover, table 3
reports the outcome of our third estimation. Model 3 indicate that none of our main variables, which
are FDI and LL, have a significant impact on growth. The main result of table 3 is that, while trade and
government spending affect growth, nor FDI nor the overall credit market size in an economy affect
11
growth. Our results also suggest that the impact on growth significantly differs between OECD
countries and Latin American countries.
After analyzing the impact of the credit size on economic growth, we assess the impact of private
credit availability on growth. The results are reported in table 4. For consistency reasons, the same
methodology has been applied as table 3. Model 1 in table 4 indicates that, once again, only trade
positively affect growth. Similar results are also presented in model 2, where only trade has an
impact on growth. Moreover, the results regarding the impact of PV and FDI on growth appears to be
robust. Model 3 suggest that only trade and the Latin American dummy appear to be significantly
affecting growth. Our results relating to the impact of trade on growth are similar to the findings of
Dollar and Kraay (2002), which reported that trade positively affect growth.
Table 4: Determinants on GDP growth over 1990-2010
GDP
FDI
Private Credit
Trade
Inflation
Population
Government
Education
Investment
LA
No. of observation
R²
1
0,136
-0,003
-0,139
0,012**
-0,002
2
0,151
-0,003
0,133
0,012**
-0,006
-0,020
-0,042
3
-0,012
-0,007
-0,405
0,016***
-0,005
-0,012
-0,066*
0,254
0,027
-1,165**
41
0,2103
41
0,2456
41
0,3666
All of our models include a constant term. *, ** and ***Indicate significance levels of 10%, 5% and 1%,
respectively
After testing the variables relating to the working of the credit market on growth, our analysis shifted
towards the impact of stock market on growth. We start by analyzing the impact of a country’s stock
market size over GDP on its development. Table 5 reports our results. Model 1 suggests that the
12
overall size of a country’s stock market does contribute to growth. After controlling for some
additional factors, the results of model 2 suggest that TV still positively affect economic growth.
Models 1 through 3 in table 5 were based on 30 observations, and the results also suggest that there
is a significant difference between OECD-member countries and Latin American countries. In
addition, domestic investment rates positively affect growth. Our results suggest that, on average,
the size of a country’s stock market affects growth.
Table 5: Determinants on GDP growth over 1990-2010
GDP
FDI
Total value traded
Trade
Inflation
Population
Government
Education
Investment
LA
No. of observation
R²
1
-0,014
0,005
1,330*
0,003
0,000
2
0,017
0,000
1,928**
0,009
0,000
0,096
-0,068*
3
-0,162
-0,005
1,198
0,013*
0,001
0,229
-0,077*
0,283
0,099**
-1,580***
30
0,2343
30
0,3614
30
0,6385
All of our models include a constant term. *, ** and ***Indicate significance levels of 10%, 5% and 1%,
respectively
Finally, we also test the impact of FDI and stock market turnover ratio on economic growth. These
tests are based on only 32 observations and cover the period 1990-2010, which is mainly due to the
availability of data. As our results in model 1 suggest, stock market turnover ratio is highly significant,
while having the expected sign. The impact of stock market turn over ratio is pretty robust across our
models, suggesting that liquid stock markets promote growth. Surprisingly, the impact of FDI on
growth has not been significant in any of our models. Liquid stock markets promote short term
investments, which in turn will lead to economic growth. Liquid stock markets promote the buying
13
and selling of stocks, since investors can exploit short term investment opportunities. Short term
investments tend to have a lower risk compared to long term investments.
Table 6: Determinants on GDP growth over 1990-2010
GDP
FDI
Stock turnover
Trade
Inflation
Population
Government
Education
Investment
LA
No. of observation
R²
1
-0,004
0,009
2,090***
0,002
0,000
2
0,020
0,006
2,280***
0,006
0,000
0,155
-0,033
3
-0,045
0,006
1,718**
0,004
0,000
0,191
-0,014
-0,014
0,076
-0,446
32
0,3963
32
0,4456
32
0,5069
All of our models include a constant term. *, ** and ***Indicate significance levels of 10%, 5% and 1%,
respectively
One main conclusion of all our models is that FDI has not contributed to economic growth. In
addition, the variables relating to the working of a country’s credit market, namely LL and PC, are
also not significant. However, the variables relating to the working of the stock market, which are TV
and SMT, did have a positive and significant impact on economic growth.
4.2 Controlling for endogeneity
As previously mentioned, since our models are based on long term averages, we have to control for
any misspecification in our models. Since FDI and financial markets affect growth, while growth also
affects FDI and financial markets, we use an instrumental variable approach to correct for this in our
estimations. We use 1 period lagged FDI values, since the findings of Wheeler and Mody (1992)
14
suggest that a country’s actual FDI stock also affects current foreign investments. So, FDI data of
1989 has been used in order to obtain the results reported in table 7.
Table 7: Determinants on GDP growth over 1990-2010- IV results
GDP
FDI
Financial market
Trade
Inflation
Population
Government
Education
Investment
LA
No. of observation
R²
LL
-0,029
-0,012
-1,018
0,015**
-0,008
-0,036
-0,067*
0,320
0,038
-1,158**
PC
-0,021
-0,022
-0,382
0,015***
-0,005
-0,005
-0,066*
0,242
0,028
-1,190**
TV
0,167
-0,016
1,224
0,013*
0,001
0,229
-0,077*
0,268
0,099**
-1,596***
SMT
-0,035
0,021
1,732**
0,003
0,000
0,185
-0,012
-0,003
0,077
-0,040
41
0,3826
41
0,3674
30
0,6388
32
0,5112
All of our models include a constant term. *, ** and ***Indicate significance levels of 10%, 5% and 1%,
respectively. FDI represent 1989 FDI values in order to control for any endogeneity issue.
Table 7 contains 4 models controlling for any endogeneity problems in our models. Model 1 assesses
the impact of LL on growth, while model 2 studies the link of PC on growth. As the results of model 1
and model 2 suggest, the workings of the credit market do not have an impact on growth. The results
of model 7 are similar to those of table 3 and table 4. Furthermore, model 3 and 4 analyzes the
impact of the overall size of the stock market and the stock market liquidity on growth, respectively.
Also, looking at the results of the Latin American dummy, we observe that the difference between
OECD and Latin American countries is highly significant.
4.3 Limitations and recommendations
Although we have tried to analyze the link between FDI, financial markets and growth thoroughly, we
have identified some limitations of our analysis. First and foremost, we did not control for the quality
15
of any of the institutions. Poor institutions cause inefficiencies on the impact of foreign capital.
Appropriate institutions positively affect the growth, since it limits fraud and excessive red-tape.
Because most of our observations are OECD-members, we assumed that these countries have proper
institutions in place. However, future studies could control for this as well. Moreover, we only
analyzed a small number of countries, pertaining to the OECD and Latin America. By including more
countries into the estimations, future studies can assess the link between FDI, financial markets and
growth more thoroughly. Also, as our models suggest, human capital does not appear to significantly
affect economic growth, while the literature is filled with findings suggesting a positive relationship.
One explanation could lie with the variable we choose to proxy human capital. By using a different
measurement to proxy for human capital, future research could better test the link between
countries’ education levels and its economic growth. Finally, even though we did not find any
significant impact of credit market on growth, future studies could use a larger number of variables
relating to the working of a country’s credit market in their analysis. Finally, in order to assess the
validity of our results, future studies could use a Granger-causality approach, based on time series
rather than cross-section, to test the link between financial markets, FDI and growth for OECD
countries.
Based on our results, we now discus some recommendations relating to a country’s stock market.
Countries should constantly review their stock market structure in order to keep up with changes in
the stock market. Countries should invest in making their stock markets more efficient, by
implementing standards to guarantee investors their investments are safe. Since our results suggest
that liquid stock markets trigger growth, implementing standards in the stock market ensures
investors are protected against fraud and against firms withholding information. As the recent
financial crisis indicates, even when financial markets are constantly under review, the complexity of
financial markets still impacts growth.
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5. Conclusion
The impact of financial market and FDI on growth has been a hot topic for decades. Some authors
suggest that financial markets are essential to economic development, while others suggest that
financial markets play no significant role in causing growth. Moreover, the impact of net foreign
capital inflow on growth has also been comprehensively discussed in the literature. This paper
contributed to the findings in the literature by analyzing the impact of financial markets and FDI on
growth, while focusing on OECD-member countries and Latin American countries. Our estimations
were based on average values over the period 1990 to 2010, and contained 4 different variables
relating to a country’s financial market. Out of these four financial variables, two variables related to
the workings of the credit market and two variables were related to the workings of the stock market
of a country. The variables relating to the workings of the credit markets are the Liquid liabilities of
the financial market over GDP and Private credit by deposit money banks and other financial
institutions over GDP, while the variables relating to the stock markets are the Total value of stocks
traded on the stock market over GDP and the Stock market turnover ratio. Our models also account
for the impact of several other factors, such as inflation rates, trade openness, education levels,
population growth, central government consumption, domestic investment rates and initial GDP per
capita.
Surprisingly, our results suggest that FDI did not have a significant impact on growth- this outcome
was quite robust across our models. When looking at the results of our financial market variables,
our models indicate that while the variables relating to the credit market did not have any significant
impact on growth, the variables relating to the stock market positively affected economic growth.
Mainly, the stock market turnover ratio, which represents the liquidity of the stock market, proofed
to have a large impact on economic growth. Similar results have been obtained by Scott-Baier and
Dwyer (2003), suggesting that countries’ stock markets are essential in triggering growth. Besides the
liquidity of a stock market, the overall size of the stock market also affects growth. Given the
17
importance of stock markets on growth, countries should constantly evaluate the changes in the
stock markets in order to guarantee investors, which is extremely important for the working of a
stock market. We also identified some aspects on which future research can build to assess the
validity of our results.
18
6. Literature list
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7. Appendix
7.1 Dataset of countries
Dataset analyzing the impact of FDI and LL on growth
Australia
El Salvador
Korea Rep.
United Kingdom
Austria
Finland
Luxembourg
United States
Belgium
France
Mexico
Guatemala
Belize
Germany
Netherlands
Honduras
Bolivia
Greece
New Zealand
Jamaica
Canada
Hungary
Norway
Panama
Colombia
Iceland
Portugal
Uruguay
Costa Rica
Ireland
Spain
Venezuela, RB
Denmark
Israel
Sweden
Dominican Republic Italy
Switserland
Ecuador
Japan
Turkey
Dataset analyzing the impact of FDI and PC on growth
Australia
El Salvador
Korea Republic
United Kingdom
Austria
Finland
Luxembourg
United States
Belgium
France
Mexico
Guatemala
Belize
Germany
Netherlands
Honduras
Bolivia
Greece
New Zealand
Jamaica
Canada
Hungary
Norway
Panama
Colombia
Iceland
Portugal
Uruguay
Costa Rica
Ireland
Spain
Venezuela, RB
Denmark
Israel
Sweden
Dominican Republic Italy
Switserland
Ecuador
Japan
Turkey
Argentina
Australia
Austria
Belgium
Brazil
Canada
Colombia
Denmark
Dataset analyzing the impact of FDI and TV on growth
Finland
Luxembourg
Turkey
France
Mexico
United Kingdom
Germany
Netherlands
United States
Greece
New Zealand
Jamaica
Israel
Norway
Peru
Italy
Portugal
Venezuela, RB
Japan
Spain
Korea Rep.
Sweden
21
Argentina
Australia
Austria
Belgium
Brazil
Canada
Colombia
Denmark
Dataset analyzing the impact of FDI and SMT on growth
Finland
Korea Rep.
Sweden
France
Luxembourg
Switserland
Germany
Mexico
Turkey
Greece
Netherlands
United Kingdom
Hungary
New Zealand
United States
Israel
Norway
Jamaica
Italy
Portugal
Peru
Japan
Spain
Venezuela, RB
7.2 Multicollinearity
LL
PC
TV
SMT
FDI
No. of observation
R²
(1)
0,097
(2)
0,132
-0,041
(3)
1,213
-1,314
1,434
(4)
2,199*
-1,969
-0,637
2,668***
(5)
-0,925
0,439
-0,668
2,883***
0,014***
41
0,0004
41
0,0004
27
0,1157
27
0,3685
27
0,5779
By including our main variables one by one and keeping track of the change in R-square we state that there is
no multicollinearity present in our models.
22