Foreign Direct Investment and Financial Openness: A Fresh Evidence from Developing Economies

Abstract

One of the critical challenges confronting developing nations is the attraction of foreign direct investment. This study examines the impact of financial openness on FDI inflows in developing countries using panel data spanning the period from 1993 to 2022, sourced from the World Development Indicators and the Worldwide Governance Indicators. The analysis employs the Generalized Method of Moments (GMM) to assess the relationship between FDI inflows (measured as net inflows as a percentage of GDP) and key economic and institutional factors, including financial openness, trade openness, GDP per capita, corruption levels, and political stability. The findings reveal that all these variables exhibit a significant and positive effect on FDI inflows at the aggregate level. Further regional analysis highlights variations across Asia and Africa. In Asia, while most variables positively influence FDI, financial openness and corruption exert a negative impact. Conversely, in Africa, all variables positively affect FDI except for corruption, which negatively influences investment due to the region’s persistent political instability. This study underscores the pivotal role of financial openness, political stability, and corruption levels in shaping FDI inflows. A stable political environment serves as a key determinant in attracting higher levels of foreign investment. Moreover, an increasing GDP per capita and an expanding domestic market enhance a country’s attractiveness to foreign investors. These insights provide valuable guidance for policymakers seeking to cultivate a favorable investment climate and promote sustainable economic growth.