FDI Led Economic Growth in Transitional Markets. Is Financial Development Relevant?
Keywords:
Foreign Direct Investment, Panel Data, Financial Development, Economic GrowthAbstract
Objectives: The study examined the impact of foreign direct investment (FDI) and financial development on economic growth in transitional markets. The study established the FDI minimum threshold level that significantly influence economic growth in transitional markets. Prior Work: The available literature on the FDI-financial development-economic growth nexus failed to reach a consensus, its mixed and quite divergent. Approach: Fixed effects model, Mundlak random model and the two-step system generalized methods of moments (GMM) methods were used. Panel threshold regression analysis was also employed. Panel data used ranges from 2005 to 2023. Results: The study noted that economic growth was positively enhanced by its own lag. FDI and financial development had a separate significant enhancing influence on economic growth in transitional markets. Economic growth was also significantly improved by the complementarity variable (FDI x financial development) in transitional markets. Implications: Transitional markets are therefore urged to develop and implement policies earmarked to increase financial development and FDI to enhance economic growth. Value: The study shows that financial development is important in enhancing FDI’s influence on economic growth in transitional markets.
References
Adams, S. (2009). Foreign direct investment, domestic investment and economic growth in sub-Saharan Africa. Journal of Policy Modelling, 31(6), 939–949.
Amin, S. (1974). Accumulation on a world scale: A critique of the theory of underdevelopment. New York: Monthly Review Press.
Awolusi, O. D., & Adeyeye, O. P. (2016). Impact of foreign direct investment on economic growth in Africa. Problems and Perspectives in Management, 14(2), 289–297.
Ayenew, B. B. (2022). The effect of foreign direct investment on the economic growth of Sub-Saharan African countries: An empirical approach. Cogent Economics & Finance, 10(1), 1–12.
Baiashvili, T., & Gattini, L. (2019). Impact of FDI on economic growth: The role of country income levels and institutional strength. European Investment Bank Working Paper, 2020/02.
Baltagi, B. H., Demitriades, P. O., & Law, S. H. (2009). Financial development, openness and institutions: Evidence from panel data. Journal of Development Economics, 89(2), 285–296.
Bekere, B., & Bersisa, M. (2018). Impact of foreign direct investment on economic growth in Eastern Africa. Determinants of Economic Growth in Africa, 95–124.
Calvo, M. B., & Sanchez-Robles, B. (2002). Foreign direct investment, economic freedom and economic growth: New evidence from Latin America. Universidad de Cantabria, Economics Working Paper No. 4/03.
Chaudhury, S., Nanda, N., & Tyagi, B. (2020). Impact of FDI on economic growth in South Asia: Does nature of FDI matter? Review of Market Integration, 12(1–2), 51–69.
Chizema, D. (2025). The impact of foreign direct investment on economic development in South Asia and South Eastern Asia. Economies, 13(6), 1–15.
Dhobha, H., Madombo, E., Mutema, P., & Akindeji, E. B. (2025). Evaluating the impact of foreign direct investment on economic growth in developing economies: Evidence from South Africa. Research in Business and Social Science, 14(7), 2147–21478.
Dinh, T. T., Vo, D. H., Vo, A. T., & Nguyen, C. N. (2019). Foreign direct investment and economic growth in the short run and long run: Empirical evidence from developing countries. Journal of Risk and Financial Management, 12(4), 1–11.
Forte, R., & Moura, R. (2013). The effects of foreign direct investment on the host country’s economic growth: Theory and empirical evidence. The Singapore Economic Review, 58(3), 1–13.
Fu, X., Pietrobelli, C., & Soete, L. (2011). The role of foreign technology and indigenous innovation in the emerging economies: Technological change and catching up. World Development, 39(7), 1204–1212.
Gaye, M. K., & Njie, M. (2023). Impact of foreign direct investment on economic growth in the Gambia: Evidence from time series analysis. The International Journal of Business and Management, 11(4), 119–131.
Glaeser, E. L., Rosenthal, S. S., & Strange, W. C. (2010). Urban economics and entrepreneurship. Journal of Urban Economics, 67(1), 1–14.
Gochero, P., & Boopen, S. (2020). The effect of mining foreign direct investment inflow on the economic growth of Zimbabwe. Journal of Economic Structures, 9(54), 1–17.
Goldsmith, R. W. (1969). Financial structure and development. Yale University Press, New Haven, CT.
Gudaro, A. M., Chhapra, I. U., & Sheikh, S. A. (2012). Impact of foreign direct investment on economic growth: A case study of Pakistan. Journal of Management and Social Sciences, 8(2), 22–30.
Gui-Diby, S. L. (2014). Impact of foreign direct investments on economic growth in Africa: Evidence from three decades of panel data analyses. Research in Economics, 68(3), 248–256.
Ho, T. T., Tran, X. H., & Nguyen, Q. K. (2023). Tax revenue-economic growth relationship and the role of trade openness in developing countries. Cogent Business & Management, 10, 1–14.
Ibara, S. B. M. (2020). Effect of foreign direct investments on economic growth in CEMAC zone: Role of human capital. Modern Economy, 11, 2122–2144.
Kholdy, S., & Sohrabian, A. (2008). Foreign direct investment, financial markets and political corruption. Journal of Economic Studies, 35(6), 486–500.
Kulu, E., Mensah, S., & Sena, P. M. (2021). Effects of foreign direct investment on economic growth in Ghana: The role of institutions. Economics of Development, 20(1), 23–34.
Koojaroenprasit, S. (2012). The impact of foreign direct investment on economic growth: A case study of South Korea. International Journal of Business and Social Science, 3(21), 8–19.
Mahembe, E., & Odhiambo, N. M. (2014). Foreign direct investment and economic growth: A theoretical framework. Journal of Governance and Regulation, 3(2), 63–70.
Makhoba, B. P., & Zungu, L. T. (2021). Foreign direct investment and economic growth in South Africa: Is there a mutually beneficial relationship? African Journal of Business and Economic Research, 16(4), 101–115.
Mamingi, N., & Martin, K. (2018). Foreign direct investment and growth in developing countries: Evidence from the countries of the Organization of Eastern Caribbean States. CEPAL Review, 124, 79–98.
McKinnon, R. I. (1973). Money and capital in economic development. The Brookings Institution, Washington, DC.
Mehdi, B. (2011). Studying the effect of foreign direct investment on economic growth in greater and traditional Middle East countries. Economic Analysis, 45(3–4), 35–43.
Moudatsou, A. (2003). Foreign direct investment and economic growth in the European Union. Journal of Economic Integration, 18(4), 689–707.
Nguyen, C. H. (2020). The impact of foreign direct investment, aid and exports on economic growth in Vietnam. The Journal of Asian Finance, Economics and Business, 7(10), 581–589.
Nor, N. H. H. M., Ripain, N., & Ahmad, N. W. (2015). Financial development and FDI-growth nexus: Panel analysis. Proceedings of the 2nd International Conference on Management and Muamalah, 435–446.
Osarumwense, O., & Drapkin, I. M. (2023). Global outward foreign direct investment and economic growth across income groups: The mediating effect of home country institutions. SAGE Open, April–June, 1–25.
Osinubi, T. S. (1998). Stock market development and long-run growth in Nigeria. M.Sc. Economics Dissertation, University of Ibadan, Nigeria.
Romer, P. (1986). Increasing returns and long-run economic growth. Journal of Political Economy, 94(5), 1002–1037.
Romer, P. (1993). Idea gaps and object gaps in economic development. Journal of Monetary Economics, 32, 543–573.
Schumpeter, J. A. (1911). The theory of economic development. Harvard University Press, Cambridge, MA.
Shahbaz, M., & Rahman, M. M. (2010). Foreign capital inflows-growth nexus and the role of domestic financial sector: An ARDL co-integration approach for Pakistan. Journal of Economic Research, 15(3), 207–231.
Shaw, E. S. (1973). Financial deepening in economic development. Oxford University Press, New York, NY.
Soumare, I., & Tchana, F. T. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, 29(Supplement 1), 1–12.
Solow, R. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65–94.
Stead, R. (2007). Foundation quantitative methods for business. Prentice Hall, England.
Swan, T. (1956). Economic growth and capital accumulation. The Economic Record, 32(2), 334–361.
Tanggapantnam, D., Geetha, C., Mohidin, R., & Vincent, V. (2011). The relationship between economic growth and foreign direct investment in Malaysia: Analysis based on location advantage theory. International Journal of Economics and Management Science, 1(2), 24–31.
Townsend, M. R. (1983). Financial structure and economic activity. American Economic Review, 73(5), 895–911.
Tran, O. K. T., Mai, D. B. M., Thi, T. T., & Nguyen, D. V. (2023). Do FDI and institutional quality affect the economic growth of local governments across Vietnam? Insights from Bayesian modelling. Scientific Papers of the University of Pardubice, 31(2), 1–11.
Tshepo, M. (2014). The impact of foreign direct investment on economic growth and employment in South Africa: A time series analysis. Mediterranean Journal of Social Sciences, 5(25), 18–27.
Wang, Q. (2015). Fixed effect panel threshold model using Stata. The Stata Journal, 15, 121–134.
Zain, M. (2019). Impact of foreign direct investment on economic growth of Pakistan. Gyancity Journal of Electronics and Computer Science, 4(2), 1–12.
Zhang, Y., Li, H., Li, Y., & Zhou, L. (2010). FDI spillovers in an emerging market: The role of foreign firms’ country of origin diversity and domestic firms’ absorption capacity. Strategic Management Journal, 31(9), 969–989.
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Kunofiwa Tsaurai
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.
