Sources of Financial Development and Their Impact on FDI Inflow: A Panel Data Analysis of Middle-Income Economies

Abstract

The present research aimed to investigate the long-run and short-run effects of different sources of financial development on FDI inflow for middle-income economies during the period of study, 1980 to 2020. An annual frequency of data was obtained for the required set of variables from WDI and the IMF. The estimations revealed no cross-sectional dependence, a significant cointegration, and the stationarity of FDI inflow at first difference, while the explanatory and controlled variables were as mixed level. It validated the panel ARDL estimations methods such as mean group, pooled mean group, and a dynamic fixed effect for testing the required set of hypotheses. The Hausman test confirmed the consistency and efficiency of the dynamic fixed effect as the method of estimations. The panel estimations revealed the significance of financial market development, inflation rate, trade openness, and real economic growth as the most critical factors for FDI inflow in middle-income economies. The policymakers should consider these factors for making their policies regarding FDI inflow in their economies. Future research may consider time series ARDL for each independent middle-income country. The findings of the study are generalized only to middle-income economies rather than higher-income and lower-income countries.