Financial development, foreign direct investment and economic growth: A panel threshold regression approach

In this study, the effects of foreign direct investment (FDI) and financial development on economic growth are examined using data from 91 countries covering the period 2001–2023. Instead of adopting the conventional "developed–developing country" classification commonly used in the literature, an objective threshold based on gross domestic product (GDP) was established, and countries were categorized according to whether they fall below or above this threshold. This approach reduces the risk of aggregation bias and enables a comparative assessment of the effects of FDI and financial development on growth across different income levels. The empirical findings indicate that FDI negatively affects economic growth in the low-income regime. In contrast, in high-income countries, the effect of FDI on growth is negative but not statistically significant. The financial development variable, on the other hand, exerts a positive impact on growth in both income regimes. The depth of financial markets supports economic growth by facilitating the efficient allocation of savings to investments, diversifying risks, and enhancing resource allocation efficiency. However, the contribution of financial development to growth appears to be more pronounced in low-income countries, while this effect diminishes marginally in high-income countries. This finding suggests that once the financial system reaches a certain level of maturity, its contribution to economic growth may gradually become limited.