Financial System Development and Foreign Direct Investment: A Panel Data Study for BRIC Countries

Abstract

Developed financial system is one of the important determinants of Foreign Direct Investment (FDI). The article analyzes the impact of financial system development on FDI with respect to BRIC countries for the period 1991 to 2010. Using the panel data analyses, fixed and random effect, our results conclude that FDI inflows to BRIC countries are influenced by banking sector and stock market variables, used as a proxy for financial development. FDI is positively influenced by size of banking sector and stock market capitalization. However, more domestic credit by banking sector negatively influences FDI inflows to these countries over the period of study. The study contributes to the existing literature as it analyzes the influence of financial sector development on China’s FDI too, not included in earlier cross-countries studies.