How Financial Development Mode­rates the Influence of FDI on Economic Growth: A Dynamic Panel Threshold Approach

Abstract

This study investigates the role of financial development in the relationship between foreign direct investment (FDI) and economic growth. We used data from 83 countries in the period 2002-2022 in combination with the dynamic panel threshold regression (DPTR) method of Kremer et al. (2013). The results indicate that FDI has a nonlinear impact on economic growth in an “inverted” U-shape, depending on different levels of financial development. At a certain level of financial development, FDI has a positive impact on economic growth, but too much finance hinders the growth impact of FDI, in line with the “vanishing effect” of financial development. These results have robust as we separate the sample into developed and developing countries, as well as add interactive analyses and replace various financial development metrics. The study concludes by discussing the policy implications for each research country group.