How Relevant is Financial Sector Development in the FDI-Exports Nexus in BRICS?

Abstract

The study investigated the impact of foreign direct investment (FDI) on exports and also explored
the influence of financial development in the FDI-exports nexus in BRICS (Brazil, Russia, India, China, South
Africa) nations using panel data analysis (fixed effects and pooled ordinary least squares) with annual data
ranging from 1994 to 2015. Whilst it is clear how FDI and financial development are separately linked to
exports growth, the role of financial sector development in the FDI-led exports hypothesis has not been
addressed in the literature. Moreover, majority of empirical studies on FDI-led exports hypothesis have shied
away from BRICS countries (see Table 1) except a study by Sahin (2018). Although the latter investigated the
two-way relationship between FDI and international trade in BRICS plus Turkey, their study did not focus on
the role of financial sector development in promoting FDI’s influence on exports growth. Both fixed effects
and pooled ordinary least squares (OLS) found out that among the five measures of financial development, it
is only stock market capitalization that enhanced FDI triggered exports growth in BRICS countries. BRICS
nations are therefore urged to implement stock market capitalization enhancement policies in order to
experience significant exports growth triggered by FDI.