The impact of financial development on OFDI: Based on GMM estimates

Abstract

In this study, we use panel data from 2010 to 2019, covering a sample of 64 countries, including developing and developed economies. This study provides an in-depth exploration of the impact of financial development on foreign direct investment (OFDI) by applying four different estimation methods, namely hybrid ordinary least squares (OLS), fixed effects estimation, random effects estimation, and systematic generalized method of moments (GMM). Impact. Investors from the source country plan and conduct direct investments in foreign countries, representing the cross-border flow of direct investment (OFDI). We measure financial development through three indicators: economic growth scale, financial product structure composition, and financial development efficiency. Our results reveal a consistent positive relationship between all dimensions of financial development and OFDI. In addition, we introduce country-specific dummy variables to stratify the analysis between developing and developed countries. Our empirical results highlight the statistical significance of these dummy variables, indicating clear differences in OFDI patterns between the two categories of countries. On this basis, this article examines developing and developed countries, respectively, and draws different conclusions. This study reveals that the impact of financial development on OFDI is significantly different in developing and developed countries, and provides new evidence on the growth of OFDI in developing countries to support this theory. The findings of this study can better provide a reference for governments in developing countries to formulate policies.