Does foreign direct investment deepen the financial system in Southeast Asian economies?

This study empirically examines the role of foreign direct investment (FDI) in triggering financial deepening (FD) in the Southeast Asian region. More specifically, it investigates the direct and indirect role of FDI in enhancing the level of FD. The findings of the robust feasible generalized least squares (FGLS) and panel-corrected standard errors (PCSE) estimators suggest that FDI acts as an essential stimulator to FD in the region – directly as well as indirectly through money supply. The results are robust under alternative specifications and institutional measures. The study recommends policymakers to carefully consider the channel of money supply that substantially influences FDI to stimulate the level of FD. In addition, it is important to understand the dynamic role of the institutional framework and other macroeconomic variables in this nexus.