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Financial system heterogeneity and FDI flows: evidence from OECD economies

Author

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  • Konstantinos Dellis

    (University of Piraeus – Bank of Greece)

Abstract
Foreign direct investment (FDI) has grown dramatically as a major form of international capital transfer over the past decades. The unprecedented growth of cross-country FDI flows has been attributed to a rich set of economic, geographical and institutional factors. In this paper we examine the role of financial system heterogeneity as a potential detrimental factor to FDI flows across OECD economies. To do so, we use a panel dataset of the most recently updated bilateral FDI data at the country level according to OECD BMD4 definition and construct measures of financial distance using a broad set of financial indicators. The econometric approach consists of a gravity-style model, estimated according to the latest advancements in econometric techniques in order to avoid omitted variable bias. The results indicate that financial system similarityis associated with increased bilateral FDI flows, a conclusion that is robust across different estimation strategies and financial distance measures. This insightful policy implication for advanced economies is that the restructuring of the financial system and harmonization to best practices can contribute to economic recovery through the FDI channel as well. Finally, the results highlight the importance for the full implementation of the Banking Union and the Capital Markets Union in the EU.

Suggested Citation

  • Konstantinos Dellis, 2019. "Financial system heterogeneity and FDI flows: evidence from OECD economies," Working Papers 269, Bank of Greece.
    • Handle: RePEc:bog:wpaper:269
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    File URL: https://www.bankofgreece.gr/Publications/Paper2019269.pdf
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    Cited by:

    1. Balázs Égert, 2021. "Investment in OECD Countries: a Primer," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(2), pages 200-223, June.

    More about this item

    Keywords

    Foreign Direct Investment; Financial Development; Economic Growth; Advanced Economies;
    All these keywords.

    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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