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Financial market development in host and source countries and their effects on bilateral foreign direct investment
Author(s) -
Donaubauer Julian,
Neumayer Eric,
Nunnenkamp Peter
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12884
Subject(s) - foreign direct investment , financial market , causality (physics) , sample (material) , economics , developing country , host (biology) , international economics , business , monetary economics , finance , macroeconomics , economic growth , ecology , chemistry , physics , chromatography , quantum mechanics , biology
We study an underexplored research question, namely whether financial market development in both host and source countries has an effect on bilateral stocks of foreign direct investment (FDI) and, particularly, whether the effect of financial market development in one member of the country pair conditions the effect of financial market development in the other member. We estimate gravity‐type models in a global sample of 43 source and 137 host countries over the period 2001–12. We address reverse causality concerns by restricting the sample to observations where reverse causality, if existent, should be less relevant. Our major and robust findings are that bilateral FDI increases with better developed financial markets in both the host and the source country and that for developing host countries, financial market development in source and host countries functions as substitutes for each other.