TITLE:
Modeling the Relationship between FDI and Financial Development in Small Island Economies: A PVAR Approach
AUTHORS:
Sheereen Fauzel
KEYWORDS:
Financial Development, FDI, Causality, PVAR
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.3,
May
31,
2016
ABSTRACT: FDI is considered as an
important source of capital investment for small island economies and is
considered as a crucial tool for attaining economic growth and development.
Most studies that have been done relating to foreign direct investment (FDI) are
rather on the link between FDI and economic growth or even the link between FD
and economic growth. Certainly, there is sufficient theoretical rationale to
ascertain that FDI does influence the development of financial market of the
recipient countries. Hence, basing on the argument that there is a lack of
studies done in this area mainly for the case of small island economies, this
paper uses a panel vector autoregressive model (PVAR) which caters for both
endogeneity and dynamism, and investigates the relationship between FDI and FD
over the time period spanning from 1990 to 2013. Actually, the study shows that
FDI can be an important ingredient for developing the financial market in small
island economies. For instance, a bi-causal
relationship between FDI and FD is observed from the
results. Also, economic growth has been identified to play a
crucial role in boosting financial development in this study. Moreover other
interesting relationships have been detected in the PVAR model.