Journal of Business and Management Sciences
ISSN (Print): 2333-4495 ISSN (Online): 2333-4533 Website: Editor-in-chief: Heap-Yih Chong
Open Access
Journal Browser
Journal of Business and Management Sciences. 2014, 2(2), 26-34
DOI: 10.12691/jbms-2-2-1
Open AccessArticle

Is FDI Spillover Conditioned on Financial Development and Trade Liberalization: Evidence from UMCs

Mahya Nobakht1, and Seyedashkan Madani1

1Department of International Business, Nanjing University of Aeronautics and Astronautics

Pub. Date: April 14, 2014

Cite this paper:
Mahya Nobakht and Seyedashkan Madani. Is FDI Spillover Conditioned on Financial Development and Trade Liberalization: Evidence from UMCs. Journal of Business and Management Sciences. 2014; 2(2):26-34. doi: 10.12691/jbms-2-2-1


Developing countries take Foreign Direct Investment (FDI) as leverage for economic growth and development as a result of FDI technology spillovers. However, the effect of FDI inflows on economic growth of host countries is conditional on the abilities of those countries in absorbing and accumulating external knowledge. The related literature paid particular attention to the role of the financial system and trade liberalization of recipients. Thus, this paper investigated empirically the intermediary roles of the financial system and trade liberalization as Absorptive Capacity (AC) factors on the FDI led growth nexus. This study provided data evidence from 33 Upper-Middle-income Countries (UMCs) over the period of 1990–2011 to contribute to the existing literature. This empirical study employed the dynamic panel “difference” GMM estimator proposed by Arellano and Bond (1991); since it prevents the biases inherent to economic growth models including auto-correlation, unobserved heterogeneity, and endogeneity between explanatory variables. The results indicated the development of the domestic financial system facilitated FDI technology spillovers in order to enhance the economic growth of UMCs. However, the empirical findings also showed a negative effect of trade openness on stimulating the FDI spillovers.

FDI inflows spillover economic growth financial system trade liberalization UMCs

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit


[1]  Jones, G. (2005). Multinationals and global capitalism (p. 277). Oxford: Oxford University Press: pp. 3, 260
[2]  World Bank Group. (2010). Investing across Borders 2010: Indicators of foreign direct investment regulation in 87 economies. World Bank Publications.
[3]  Adams, S. (2009). Can foreign direct investment (FDI) help to promote growth in Africa. African Journal of Business Management, 3 (5), 178-183.
[4]  Johnson, A. (2006). The effects of FDI inflows on host country economic growth. The Royal Institute of technology. Centre of Excellence for studies in Science and Innovation
[5]  Blomström, M., & Kokko, A. (1996). The impact of foreign investment on host countries: a review of the empirical evidence. Policy Research Working Paper, 1745.
[6]  Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth?. Journal of international Economics, 45 (1), 115-135.
[7]  Aitken, B., Hanson, G. H., & Harrison, A. E. (1997). Spillovers, foreign investment, and export behavior. Journal of International economics, 43 (1), 103-132.
[8]  Bengoa, M., & Sanchez-Robles, B. (2003). Foreign direct investment, economic freedom and growth: new evidence from Latin America. European journal of political economy, 19 (3), 529-545.
[9]  Imoudu, E. C. (2012). The Impact of Foreign Direct Investment on Nigeria’s Economic Growth; 1980-2009: Evidence from the Johansen’s Co-integration Approach. International Journal of Business and Social Science, 3 (6), 122-134.
[10]  Te Velde, D. W. (2006). Foreign Direct Investment and Development: An Historical Perspective. Background Paper for World Economic and Social Survey for.
[11]  Marr, A. (1997). Foreign direct investment flows to low-income countries: a review of the evidence. Overseas Development Institute Briefing Paper. London.
[12]  World Bank Group. International Debt Statistics (2013): External Debt of Developing Countries. World Bank-free PDF, 2013.
[13]  Alfaro, L. (2003). Foreign direct investment and growth: Does the sector matter. Harvard Business School, 1-31.
[14]  Xu, B. (2000). Multinational enterprises, technology diffusion, and host country productivity growth. Journal of Development Economics, 62 (2), 477-493.
[15]  Balasubramanyam, V. N., Salisu, M., & Sapsford, D. (1999). Foreign direct investment as an engine of growth. Journal of International Trade & Economic Development, 8 (1), 27-40.
[16]  De Mello Jr, L. R. (1997). Foreign direct investment in developing countries and growth: A selective survey. The Journal of Development Studies, 34 (1), 1-34.
[17]  Alfaro, L., Kalemli-Ozcan, S., & Sayek, S. (2009). FDI, productivity and financial development. The World Economy, 32 (1), 111-135.
[18]  Criscuolo, P., & Narula, R. (2008). A novel approach to national technological accumulation and absorptive capacity: aggregating Cohen and Levinthal. The European Journal of Development Research, 20 (1), 56-73.
[19]  Li, X., & Liu, X. (2005). Foreign direct investment and economic growth: an increasingly endogenous relationship. World development, 33 (3), 393-407.
[20]  Hermes, N., & Lensink, R. (2003). Foreign direct investment, financial development and economic growth. The Journal of Development Studies, 40 (1), 142-163.
[21]  Chee, Y. L., & Nair, M. (2010). The Impact of FDI and Financial Sector Development on Economic Growth: Empirical Evidence from Asia and Oceania. International Journal of Economics and Finance, 2 (2), P 107.
[22]  Balasubramanyam, V. N., Salisu, M., & Sapsford, D. (1996). Foreign direct investment and growth in EP and IS countries. The Economic Journal, 92-105.
[23]  Sukar, A., Ahmed, S., & Hassan, S. (2011). The Effects of Foreign Direct Investment on Economic Growth: The Case of Subsahara Africa. Southwestern Economic Review, 34, 61-74.
[24]  Carkovic, M., & Levine, R. (2002). Does foreign direct investment accelerate economic growth? U of Minnesota Department of Finance Working Paper.
[25]  Schulz, H. (2009). Political Institutions and Foreign Direct Investment in Developing Countries: Does the Sector Matter?. Available at SSRN 1403983.
[26]  Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2003). FDI and Economic Growth: The Role of Local Financial Markets.
[27]  Durham, J. B. (2004). Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. European economic review, 48 (2), 285-306.
[28]  Huang, Y. (2010). Determinants of Financial Development. Palgrave Macmillan.
[29]  Levine, R. (1997). Financial development and economic growth: views and agenda. Journal of economic literature, 688-726.
[30]  Levine, R. (2005). Finance and growth: theory and evidence. Handbook of economic growth, 1, 865-934.
[31]  Jahan, S., & McDonald, B. (2011). ABigger slice. Finance & Development, 17.
[32]  Calderón, C., & Fuentes, R. (2006). Complementarities between institutions and openness in economic development: Evidence for a panel of countries. Cuadernos de economía, 43(127), 49-80.
[33]  Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of monetary Economics, 46 (1), 31-77.
[34]  Levine, R., & Zervos, S. (1996). Stock markets, banks, and economic growth (No. 1690). The World Bank.
[35]  FitzGerald, V. (2007). Financial development and economic growth: a critical view. Flat World, Big Gaps, ed. KS Jomo. Hyderabad: Orient Longman. Available at
[36]  Ghimire, B., & Giorgioni, G. (2009). Puzzles in financial development and economic growth. Working Paper, Liverpool Business School, Liverpool John Moores University.
[37]  Ndikumana, L. (2000). Financial determinants of domestic investment in Sub-Saharan Africa: Evidence from panel data. World Development, 28 (2), 381-400.
[38]  UNCTAD, G. (2012). World investment report: Toward a New Generation of Investment Policies. Unite Nations. New York and Geneva, 2012.
[39]  IMF. (1997). World Economic Outlook, Washington. : p. 84
[40]  Rodriguez, F., & Rodrik, D. (2001). Trade policy and economic growth: a skeptic's guide to the cross-national evidence. In NBER Macroeconomics Annual 2000, Volume 15 (pp. 261-338). MIT PRess.
[41]  Nicet-Chenaf, D., & Rougier, E. (2009). FDI and growth: A new look at a still puzzling issue (No. 2009-13). Groupe de Recherche en Economie Théorique et Appliquée.
[42]  De Mello Jr, L. R. (1999). Foreign direct investment-led growth: evidence from time series and panel data. Oxford Economic Papers, 51 (1), 133-151.
[43]  Shafaeddin, M. S. (2005). Trade liberalization and economic reform in developing countries. The IMF, World Bank and Policy Reform, 155.: pp. 2, 20
[44]  Anyanwu, J. C. (2012). Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries. Annals of Economics and Finance, 13 (2), 425-462.
[45]  David, H. L. (2007). A Guide to Measures of Trade Openness and Policy. Retrieved February, 22, 2013.
[46]  UNCTAD, G. (2012). World investment report: Toward a New Generation of Investment Policies. Unite Nations. New York and Geneva, 2012.
[47]  Calderón, C., Loayza, N., & Schmidt-Hebbel, K. (2006). External conditions and growth performance. External Vulnerability and Preventive Policies. Central Bank of Chile, Santiago.
[48]  Schulz, H. (2009). Political Institutions and Foreign Direct Investment in Developing Countries: Does the Sector Matter?. Available at SSRN 1403983.
[49]  Goldar, B., & Kumari, A. (2003). Import liberalization and productivity growth in Indian manufacturing industries in the 1990s. The Developing Economies, 41 (4), 436-60.
[50]  Kokko, A., Zejan, M., & Tansini, R. (2001). Trade regimes and spillover effects of FDI: Evidence from Uruguay. Weltwirtschaftliches Archiv, 137 (1), 124-149.
[51]  Greenaway, D., & Kneller, R. (2007). Firm heterogeneity, exporting and foreign direct investment. The Economic Journal, 117 (517), F134-F161.
[52]  Trevino, L. J., & Upadhyaya, K. P. (2003). RESEARCH NOTE Foreign aid, FDI and economic growth: evidence from Asian countries. United Nations, 12 (2), 119.
[53]  Ferreira, P. C., & Rossi, J. L. (2003). New Evidence from Brazil on Trade Liberalization and Productivity Growth*. International Economic Review, 44 (4), 1383-1405.
[54]  Lai, M., Peng, S., & Bao, Q. (2006). Technology spillovers, absorptive capacity and economic growth. China Economic Review, 17 (3), 300-320.
[55]  Hsiao, C. (2003). Analysis of panel data (Vol. 34). Cambridge university press.: p. 311
[56]  Wooldridge, J. M. (2009). Introductory Econometrics: A Modern Approach: A Modern Approach. Cengage Learning.: p. 10
[57]  Nerlove, M. (2000, June). An essay on the history of panel data econometrics. In Proceedings of Ninth International Conference on Panel Data, Geneva, Switzerland.: p. 13
[58]  Moral-Benito, E. (2012). Determinants of economic growth: a Bayesian panel data approach. Review of Economics and Statistics, 94 (2), 566-579.
[59]  Barro, R. J., & Sala-i-Martin, X. (2004). Economic Growth: MIT Press. Cambridge, Massachusettes.: pp. 20, 285-316
[60]  Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58 (2), 277-297.
[61]  Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9 (1), 86.
[62]  Beck, T., Levine, R., & Loayza, N. (2000). Finance and the Sources of Growth. Journal of financial economics, 58 (1), 261-300.
[63]  Madani, S., & Nobakht, M. (2014). Political Regimes and FDI Inflows: Empirical Evidence from Upper Middle Income Countries. Journal of Finance and Economics, 2 (3), 75-82.
[64]  Baltagi, Badi. Econometric analysis of panel data. Wiley. com, 2005.: p. 239
[65]  Levin, A., Lin, C. F., & James Chu, C. S. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of econometrics, 108 (1), 1-24.
[66]  Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of econometrics, 115(1), 53-74.
[67]  Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and statistics, 61 (S1), 631-652.
[68]  Choi, I. (2001). Unit root tests for panel data. Journal of international money and Finance, 20 (2), 249-272.
[69]  Alesina, A., Spolaore, E., & Wacziarg, R. (2005). Trade, growth and the size of countries. Handbook of economic growth, 1, 1499-1542.
[70]  Michalopoulos, C., & Ng, F. (2013). Trends in developing country trade 1980-2010. World Bank Policy Research Working Paper, (6334).
[71]  Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy, 23 (2), 397-415.
[72]  Moral-Benito, E. (2010). Panel growth regressions with general predetermined variables: likelihood-based estimation and Bayesian averaging. CEMFI WP No, 1006.
[73]  Olofsdotter, K. (1998). Foreign direct investment, country capabilities and economic growth. Review of World Economics, 134 (3), 534-547.