Exploring the FDI-growth-finance nexus: Does the level of economies matter?

The nature of foreign capital inflows and innovation introduces uncertainty in determining growth priorities, either in advanced or emerging economies. The aim of this study is to investigate the nexus relationship between foreign direct investment (FDI), economic growth (EG) and financial development by focusing on the levels of economies. Using panel data and a panel pooled mean group (PMG) estimation approach, this study finds that FDI and financial development are crucial factors stimulating long-term EG. Specifically, in emerging economies, this study finds that the institutions-based financial system is more dominant than the market-based financial system when attracting capital inflows. This response shows that emerging economies experience an effect of intermediation institutions first to build inclusive financial development. However, this result differs in middle economies. The nexus relationship in middle economies is more varied since these economies experience a transitional cycle that affects financial institutions (FIs) and financial markets simultaneously when attracting investment and stimulating growth. While in advanced economies, there is a significant driver of growth from market financial systems and investment inflow.