nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2008‒06‒07
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Do Foreign Direct Investments Increase the Economic Growth of Southeastern European Transition Economies? By Stanisic, Nenad
  2. Finance and cluster-based industrial development in China: By Ruan, Jianqing; Zhang, Xiaobo
  3. Stock Market Development and Economic Growth:An ARDL Causality in Pakistan By Shahbaz, Muhammad; Ahmad, Nadeem; Ali, Liaqat

  1. By: Stanisic, Nenad
    Abstract: There are two important effects of foreign direct investments (FDI) on a host economy: the effect on economic growth and the effect on export performances. Both economic features are important for the transition economies' prospects of European Union (EU) accession. After a short review of relevant research, this paper examines the statistical relationship between FDI inflow and economic growth. Results do not reveal any positive correlation between these two variables. Lack of correlation between FDI inflows and economic development is rather the consequence of methodological imperfections, than the real absence of positive influences of FDI. The problem arises from the fact that the observed countries are in the transition process. Due to structural reforms, there is production and employment decrease in inefficient domestic firms. This can neutralize or even outweigh the positive effect of FDI on economic growth of host sectors.
    Keywords: Foreign Direct Investments; Economic Growth; Transition Economies; Southeast Europe
    JEL: C10 F21 O52
    Date: 2008–05–15
  2. By: Ruan, Jianqing; Zhang, Xiaobo
    Abstract: "The traditional literature emphasizes the causal role of finance in promoting industrial growth. China's rapid industrialization over the past several decades, which has occurred in the absence of well-functioning financial markets, seems to defy the conventional wisdom. By studying a cashmere sweater cluster in China, this paper argues that rural industrial clustering, as a new business model, lowers the entry barriers of initial capital investment through the division of labor. Within these clusters, enterprises can often acquire trade credits from upstream or downstream firms and obtain informal financing from friends and relatives, and use these funds to mitigate constraints of working capital. These findings help explain China's rapid industrialization in the absence of an efficient financial market." from Author's Abstract
    Keywords: Industrialization, Cluster, Finance, Growth, industrial development,
    Date: 2008
  3. By: Shahbaz, Muhammad; Ahmad, Nadeem; Ali, Liaqat
    Abstract: Contemporary economies of developing countries are changing due to rapid changes in the world economy. The emergence of international financial industry for worldwide network of transactions altered the role of international economy. Increased financial flows have altered the role of private capital and subsequently effect resource allocation. The economies of developing countries are witnessing changes in the composition of capital flows because world equity market is expanding rapidly. Foreign direct investment (FDIs) and stock market boom are the indicators of the changing world economic order. Earlier, most of the developing nations were facing serious liquidity problems thus compromising economic growth. Now, it is important to study how the changes in financial sector contributed in the overall growth of the economy. This paper endeavors to investigate whether there is a relationship between stock market development and economic growth in case of developing economy such as Pakistan. The data set covers annual times series data from 1971 to 2006. We employed two new tests, i.e., DF-GLS, and Ng-Perron to find integrating order of the said variables of the study. To test long-run robustness, J-J Co-integration and ARDL bounds testing techniques are applied. To investigate long-run causal linkages and short-run dynamics, Engle-Granger causality and ARDL tests are applied respectively. After finding order of integration, our findings suggested that there exist a very strong relationship between stock market development and economic growth. Engle- Granger-Causality estimation confirms in the long-run, there is bi-directional causality between stock market development and economic growth. However, for short-run, there exist only one-way causality, i.e., from stock market development to economic growth.
    Keywords: Market Capitalization; Growth; Causality
    JEL: B22
    Date: 2008–03–03

This nep-fdg issue is ©2008 by Iulia Igescu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.