FDI and financial development: evidence from eight post-communist countries

Abstract

This paper empirically examines the effects that host countries’ financial development (FD) has on foreign direct investment (FDI). The departure from earlier studies of the role of FD in attracting FDI is in the multidimensional FD index. Thus, this paper investigates the causal relationship between FDI and FD in eight post-communist countries. The bootstrap panel Granger causality approach is utilized to detect the direction of causality. The findings show that there is only a unidirectional causality running from FD to FDI in six countries out of eight under review. The policy implication of the findings is that countries wishing to attract more FDI should implement measures to improve access to external finance and this should be accompanied by a well-functioning and adequately regulated financial system.