ABSTRACT
In this article, we test the impacts of financial competitiveness and financial openness on bilateral FDI with novel indexes, covering 127 host countries and 122 home countries from 2009 to 2016. We find that the improvement of financial competitiveness and financial openness significantly increases the FDI assets in the home country and significantly increases the FDI liabilities in the host country. In particular, the impacts of financial competitiveness and financial openness are significant both on the intensive and extensive margins. In addition, the above results remain robust in further analyses, such as using sub-index of financial competitiveness, using quantile regression model, considering capital control on FDI and dealing with the endogenous problem. The study demonstrates the financial competitiveness and financial openness are important factors to explain why FDI positions are relatively small in some developing countries.
Notes
1. In CDIS database, the value of “0” reflects the investment less than “± $500,000” or the investment amount reported as “0”.
2. Mayer and Zigano(Citation2011) point out there are two kinds of distance measures in CEPII database: simple distances and weighted distances. Here we use variable distcap of the simple distances in the bilateral file dist_cepii.xls. It measures the geographic coordinates of the capital cities of the host and home country.
3. The method to calculate institutional distance is: calculate the institutional quality inst_i and inst_j by extracting the first-order principal components from the sub-indexes of the six dimensions, and then get the institutional distance inst = | inst_i-inst_j |.
4. In the Global Competitiveness Report 2010-2011, the affordability of financial services is added to financial competitiveness.
5. Plenty of developing countries have very small economic scales, for example some island country in south pacific, such as The Republic of Fiji, Independent State of Papua New Guinea, and so on. We delete these countries in our sample.
6. Due to the KA database only includes data until 2015, the sample of covers data from the years 2009 to 2015.
7. The indexes in the database of KAOPEN and KA only reflect big changes in the financial openness, so they will not constantly change with time. The choice of the financial openness by central bank is more affected by long-term fundamentals such as domestic economy and financial development, while is less affected by short-term FDI inflows and outflows. Therefore, we set the financial openness of the home and host country as exogenous variables.