nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2007‒10‒13
four papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Does Foreign Direct Investment Promote Growth? Panel Data and Time Series Evidence from Less Developed Countries, 1970-2002 By Sarkar, Prabirjit
  2. Change and constancy in the financial system: implications for financial distress and policy By Claudio E. V. Borio
  3. Foreign Direct Investment and Economic Growth: Empirical Evidence from Sectoral Data in Indonesia By Ilan Noy

  1. By: Sarkar, Prabirjit
    Abstract: The present study casts some doubt on the growth-promoting effect of foreign direct investment (FDI), which is widely supported by the proponents of financial globalization. The panel data analysis of 51 less developed countries shows a rising relationship between growth and FDI (relative to gross capital formation) only for the group of 11 relatively rich and open-economy countries. The time-series analysis observes meaningful positive relationships between FDI and growth only for 3 countries belonging to this group and some other countries. But by and large no long-term positive relationship exists between the two irrespective of income levels, openness and FDI-dependence.
    Keywords: Foreign Direct Investment; Financial Globalization; Liberalization.
    JEL: F40 F50 F02 O10 O50 O16
    Date: 2007–10
  2. By: Claudio E. V. Borio
    Abstract: Over the past three decades, the financial system has been going through a historical phase of major structural change. This paper traces the implications of this financial revolution for the dynamics of financial distress and for policy. It argues that, despite this revolution, some fundamental characteristics of the financial system have not changed and that these hold the key to the dynamics of financial instability. These characteristics relate to imperfect information in financial contracts, to risk perceptions and incentives, and to powerful feedback mechanisms operating both within the financial system and between that system and the macro-economy. As a result, the primary cause of financial instability has always been, and will continue to be, overextension in risk-taking and balance-sheets. The challenge is to design a policy response that is firmly anchored to the more enduring features of financial instability while at the same time tailoring it to the evolving financial system. Using an analogy with road safety, policy has so far largely focused quite effectively on improving the state of the roads and on introducing buffers. More attention, however, could usefully be devoted to the design and implementation of speed limit.
    Keywords: Financial revolution, financial instability, risk, liquidity, financial regulation, speed limits
    Date: 2007–10
  3. By: Ilan Noy (Department of Economics, University of Hawaii at Manoa)
    Abstract: The paper investigates the impact of foreign direct investment (FDI) on economic growth using detailed sectoral data for FDI inflows to Indonesia over the period 1997-2006. In the aggregate level, FDI is observed to have a positive effect on economic growth. However, when accounting for the different average growth performance across sectors, the beneficial impact of FDI is no longer apparent. When examining different impacts across sectors, estimation results show that the composition of FDI matters for its effect on economic growth with very few sectors showing positive impact of FDI and one sector even showing a robust negative impact of FDI inflows (mining and quarrying). The sectors examined are: farm food crops, livestock product, forestry, fishery, mining and quarrying, non-oil and gas industry, electricity, gas and water, construction, retail and wholesale trade, hotels and restaurant, transport and communications, and other private and services sectors.
    Keywords: Foreign direct investment, economic growth, Indonesia
    JEL: F21 F23
    Date: 2007–10–01
  4. By: Puah, Chin-Hong; Kueh, Jerome Swee-Hui; Lau, Evan
    Abstract: The relationship between Foreign Direct Investment (FDI) and Gross Domestic Products (GDP) had become the centre piece of recent researches in identifying the short run and long run implications between the two variables. Using the hypotheses of FDI led GDP and GDP led FDI as theoretical framework, this study intends to analyze the implications of the rise of China towards the ASEAN-5 countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand from the perspective of FDI and GDP. The cointegration and vector error correlation estimate test results showed that there is a significant positive long run relationship between FDI of China and GDP of ASEAN-5. However, we failed to detect any short run causal relationship among the variables under study.
    Keywords: Cointegration; Granger causality; FDI; ASEAN-5
    JEL: C32 O53 F21
    Date: 2007–10–09

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