FDI and Local Financial Market Development in Oil Exporting and Importing Emerging Economies: VAR Panel Approach

The literature on foreign direct investment (FDI) has introduced the several links between financial market developments and FDI inflows across developing and developed countries. Also, the empirical literature demonstrates that financial market development reduces informational frictions and promote resource allocation more efficiently. Moreover, financial systems are vital for both productivity and development, where the better developed financial systems can receive more benefit from FDI and FDI inflows depend on the condition of the host country and their characteristics. The paper tries to examine and compare the relationship between foreign direct investment and local financial market development across oil exporting and importing emerging market economies by using VAR panel model during 1970-2014. The results illustrate that there is a relationship between financial market development and FDI, and financial development indicators are causality for FDI, particularly banking system indicators. Moreover, the banking system is more important and efficient in oil importing countries than oil exporting countries to attract FDI from abroad.