Financial Development as a Key Determinant of FDI Inflow to Developing Countries

This paper investigates the key factors affecting the foreign direct investment (FDI) inflow to deve­­loping countries during the period (1995-2010) with emphasis on the financial development. Financial development, as an important factor in FDI absorption and a prerequisite for utilizing the benefits of FDI, not only increases the FDI inflow in developing countries, but also improve the absorption capacity and ability of these countries to utilize the benefits of FDI. Since the financial system consists of several components and provides a variety of services, various indicators, which represent the development of different aspects and components of financial system, have been applied in order to assess the impact of financial development on the FDI. Results indicate that development of various components of financial system (stock market and banking sector) as well as different aspects of financial development (size and activity level of financial system) all have positive and significant impact on the FDI inflow in developing countries during the studied period.