Financial development’s influence on FDI in transitional markets: An investigation of the dynamic threshold effects

Abstract

The effect of financial development on foreign direct investment (FDI) in transitional markets is the focus of this paper. An investigation was conducted to contribute to the literature, which is currently mixed, conflicting, divergent, and far from concurring as far as empirical research findings are concerned. The novelty lies in the focus on transitional markets, the interaction variable (financial development x technology) on FDI, threshold analysis, and the use of the most recent dataset. Panel-corrected standard errors and threshold regression with data from 2009 to 2023 were used. Financial development significantly improved FDI in transitional markets under both methods (threshold regression and panel-corrected standard errors). Higher levels of technological advancement significantly enhanced FDI in transitional markets. The combination of financial development and technology significantly enhanced FDI inflows in transitional markets. The marginal effect of financial development on FDI is larger when financial development is below 74% of GDP, but the effect becomes more precisely estimated (more statistically significant) above the threshold. The paper noted that financial development and technology are critical elements in improving FDI inflows. Transitional markets need to develop a financial-development-enabling regulatory framework and implement technology-advancement-oriented research and innovation to significantly attract FDI.