The Impact Of The Introduction Of Financial Development In Developing Countries On Fdi

The thesis focuses on the impact of the financial development upon inflow FDI in the context of developing host countries. Our contribution in this thesis lies in putting forward a theoretical framework to explore the mechanism of the effect of the financial development on FDI. The mechanism can be summarized as follows: the financial development level of the host country determines directly the extent that the local firms are financially constrained, and thus the market thickness of the intermediate goods as well as the expected profit rate of FDI after its entry. In consideration of this, FDI decides the distribution of its capital among host regions and among sectors. And another important point we get from the thesis is that the financial development of the host country might, by influencing the sector choice of FDI, has some impacts on the spillover potential of foreign capital.The whole thesis is composed of six parts. The first part both review the related literature in this field and discuss the meaning of our research, the method it uses, the contribution as well as the structure of the thesis.In the following two chapters, by adopting the statistical methods, we give a picture of the current condition of FDI entry and the financial development in the developing host countries, which is expected to facilitate the discussion of the relationship between the two factors in the future. Concretively, in the "FDI channeling" part, we research into the characteristics of the inflow FDI into the developing countries by region and by sector, and find that the gap of per capita FDI between developed and developing countries is mainly owing to the gap of their population growth rate. While within the developing countries, it is the gap of amount of inflow FDI that has made the difference. And the sector-wise research reveals that FDI distributes unequally among different sectors. All in all, this part makes it necessary to delve into research into the factors behind that have caused all these differences of inflow FDI.The "financial development" part begins with picturing in detail the state of being of the financial development of the developing countries with several indexes. And then the very chapter explores empirically the determinants of financial development using the law & finance theory, which is a new research in this field. Our conclusions are as follows: the financial market in the developing countries is generally rather backward, especially the security market; the bank plays a major role in the financial system of the developing countries; factors such as economic development, the efficiency of the legal system as well as the opening policy all determine the financial development in these countries.The "theoretical framework" part explores the mechanism that the financial development impacts on the sector-wise inflow FDI. The main conclusions are: the profit of FDI which produces in the final good sector is determined by the labor cost, as well as the price and the types of the intermediate goods; if the financially constrained local firms cannot enter into the intermediate goods market (owing to the backward financial system), then the thickness of this very market is weakened: the price of the intermediate goods is big, while the type small. As a result, the negatively affected FDI must make choices concerned with the regions and the sectors it will flow in.The following two parts aim to examine the theory empirically from the cross country perspective as well as the individual country perspective (that is, China). Both parts conclude that the financial development is the key determinant of the amount of inflow FDI, despite that the effect is decreasing with the development of the financial system. Furthermore, the sector-wise research reveals that if the financial system of the host country improves, then FDI producing in those sectors which uses intermediate goods intensively will be induced more significantly. What is worth mentioning here is that the China perspective is not only the logical necessity of this thesis, but also a start point for any research here in this country.The last part concludes the whole thesis and reiterates the major results, and points out the further direction in the future.