Foreign Direct Investment, Institutional Quality, and Financial Development along the Belt and Road: An Empirical Investigation

ABSTRACT

The source of financial development is less investigated in the literature, especially the role foreign direct investment (FDI) plays on financial development. Using data from 50 countries joining the Belt and Road Initiative, this article at first time tests the impact of FDI on financial development in a host country. Empirical results show that FDI can significantly improve the development of financial sector, especially the development of financial markets. FDI is found to be a stronger driver of financial development for countries with higher quality institutions. Moreover, FDI not only increases financial deepening, but also enhances financial function.

KEY WORDS:

• FDI
• financial development
• financial function
• institutional quality
• the Belt and Road Initiative

JEL CLASSIFICATIONS:

• F21
• G2
• K0

Notes

1. We have also done a robust test about the measurement of financial development (e.g. M2/GDP), and we have obtained the same results.

Additional information

Funding

This work was supported by Special Research Fund of China-ASEAN Collaborative Innovation Center for Regional Development and Development Program of Ministry of Education for Changjiang Scholars and Innovative Teams (Grant No.CW201617), the Scientific Research Foundation for the Young Teachers of School of Finance of Central University of Finance and Economics in 2018，the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China (Grant No.18XNA002), and the National Social Science Fund of China (Grant No.18XJY023).