Financial Development Threshold Levels for FDI: Evidence from Selected Upper-Middle Income Countries

Abstract

Using a panel of 11 upper-middle income emerging economies, the paper investigates financial development threshold levels that influence FDI inflows. Our findings show that higher banking sector and stock market development above the threshold levels have a positive and significant impact on FDI inflows, which result is consistent with theoretical predictions. On the contrary, private and public bond market development levels equal to or greater than the threshold levels have a negative but insignificant influence on FDI inflows, whereas levels of private and public bond market development less than the threshold have a positive but insignificant impact on FDI inflows. Overall, our findings support the proposition that high financial development levels in the host country crowds out FDI as foreign investors may opt for portfolio investment.