Research On The Different Impact Of Patterns Of International Capital Inflow On Financial Development

In current studies on financial openness-economic growth, some structural settings, including under-developed financial sector, instability of macroeconomic policies, poor quality of institution, and lack of trade openness, are considered as important factors influencing growth effect of financial openness. In empirical studies, financial development is also treated as important control variable. These improved studies on the conditions of openness-growth effect, but also have shortcomings-they ignored the endogeneity of financial development under openness circumstances, as openness itself can impact financial development. Although a few literatures have attempted to involve this point, but they are lack of reliable theoretical foundation in general, can not character the mechanism that financial openness can affect financial development. To solve the problem above.1 developed a macro framework involving endogenous financial sector helping to analysis the impact of international capital inflows on an economy's financial sector. There are three sectors in this framework, including household, financial intermediary and final good production. The households exist for two period, they should determine the usage of welfare endowed at the beginning of the first period, consumption or saving, all saving will be provided to financial sector. Unlike the studies before, the financial sector are assumed as a producing sector, using savings and labor provided by household to produce financial goods, instead of a channel between saving and investment. Financial goods (or financial capital) will be transformed into investment (or industrial capital) during the transaction between financial sector and final goods sector. Final goods sector produce by industrial capital and labor. The household get wage and interest from the financial and final sector. Expected income determines saving-consumption decision-making in return. In short, household determination, financial production and final goods production are cross-determined.So, the most improvement of this framework is the reconsideration of the function and operation of financial sector-household saving cannot be transformed into investment, esp. in the large scale production era. So the financial sector exits not only for imperfect information, industrial capital should be produced by an independent economic sector. This setting reflects the important effect of financial sector in the process of enterprises foundation, production scale enlargement and operating.To measure the impact of foreign capital inflows on financial sector, financial development was defined in three dimensions based on the model, the output scale of the financial sector, increased financial production efficiency, and capital transformation efficiency. For simplicity, assume the technological parameter of the financial sector production function is exogenous variable, so we can ignore the financial development introduced by technological progress and human capital accumulation, and focus on the impact of international capital inflow on financial development. After this setting, the impact of capital inflow on financial sector will be shown in two aspects:scale of financial output and capital transformation efficiency.According to the different channel the foreign capital flow into a host country, all capital inflows are classified into two major categories-FDI and non-FDI. The main method used is comparative static analysis, and different family dec is ion-making in closed and open conditions is used as fulcrum to analysis the impact of different types of capital inflow. The results show that international capital flows has important influence on financial development, indicating not only that the level of a country's financial development affects growth, but also is affected by international capital flows. Foreign capital affects the scale of financial sector and capital transformation by changing the input of financial and final goods sector. The result also show that non-FDI will reduce the expected return of household saving (this implies the motivation of the household to save), and will increase the total saving input of financial sector as well, and then the output scale of financial sector will be increased. This can also increase the capital transformation efficiency when the transformation friction is considered. But the impact of FDI inflow on financial sector is negative. Because the rise of household wages caused by FDI inflow is larger than interest income decline, this will make the household save less, and reduce their financial supply to financial intermediary. This article focuses on the impact of capital inflows on a country's financial sector. Actually, the international capital flow patterns of development economies are reversed, some have net FDI inflow and net portfolio outflow, some have scare FDI inflow but large portfolio outflow, or some have both net FDI inflow and portfolio inflow. These patterns can also be explained by the model. Two kinds of frictions-capital transformation friction and capital cross-border movement friction-must be introduced to do this. We can derive non-FDI flow condition using capital transformation friction, and derive FDI cross-border movement condition using capital movement friction. And then, different capital flow patterns can be explained by different combination.The empirical study was conducted using panel data from 61 developing economies. The result shows that the model is suitable for emerging market economies (EMGs). For other developing economies, which factor market is not cleared and financial market more under-developed, is not suitable. For EMGs. excessive FDI inflow has significant negative impact on local financial sector, regardless estimation using static panel regression or GMM dynamic regression. However. non-FDI inflow can increase the scale and efficiency of domestic financial sector, more competition in bank sector also lead to lower profitability of banks. Further more, non-FDI inflow can also prompt local stock market significantly.Based on the results of empirical analysis, this paper argues that for less developed developing-economies, FDI inflows should be opened first, utilizing the crowd-in effects of FDI to promote local investment, employment and the efficiency of factors, and to promote local financial sector development as well; while for better developed developing-economies, in particular the ones with higher degree of market, relatively full employment, the crowd-out effect of FDI inflows begin to appear, openness to non-FDI should be implemented to promote local financial sector, and to improve efficiency of capital transformation.