FDI And Economic Growth: The Role Of Financial Markets

The country implementing the policy of opening up is eagerly looking forward to spurring national economic growth through attracting foreign direct investment (FDI) .The study of the relations between FDI and economic growth was started after the Second World War. Both theoretical and empirical studies have shown that the host country must have certain conditions in order to enlarge the spillover effects of FDI and to make FDI helpful to the promotion of their economic growth. These conditions include sound infrastructure, perfect legal system, rich human capital and reasonable knowledge structure, etc. However, before the 21 century, the literature of FDI and economic growth has generally ignored the importance of financial factors in the spillover effects of FDI, or the promotion of FDI in the economic growth. Years ago, some literature began to discuss the importance of financial development, particularly the domestic financial markets in spillover effects of FDI, or in the economic growth promoted by FDI, but those theoretical analyses were relatively insufficient and those empirical analyses were lack of representative. For the purpose of advancing the theory of FDI and economic growth, this paper analyzes theoretically and empirically the role of domestic financial markets in FDI and the host economic growth.In this paper, the theoretical research shows that from the perspective of FDI enterprises, or from the perspective of the domestic enterprises which are competing or dealing with the FDI enterprises, developed domestic financial markets can enlarge the positive spillover effects of FDI, and promote FDI to accelerate the economic growth in the host country; instead, underdeveloped domestic financial markets will hinder or even lower the contribution of FDI to the economic growth in the host country.Through the channels of turning savings into investment , capital formation, investment realization, technological advances and increased employment, the developed domestic financial markets can enlarge spillover effects of FDI, and push FDI to promote economic growth in the host country.