The effect of financial development and financial stability on foreign investments

Foreign capital is one of the greatest support for development in developing countries. Capital is one of the most important factors in growth. Because of insufficient savings in developing countries' economies and lack of available capital stock, economies need external capital. Foreign capital enters into an economy in two ways. One of them is foreign direct investment, while the other is hot money called portfolio investments. Although both types of capital contribute to the economy, it is emphasized in the economic theory that foreign direct investments are more efficient in financing development. There are a number of factors that determine the capital inflows to an economy. As capital moves from country to country, it aims at profit maximization and there are external factors that determine this profit. As a matter of fact, economic managers implement policies to encourage foreign capital to enter their countries. In this study, the effect of financial development and the financial stability that has become a popular factor recently on foreign capital inflows are examined by taking into account both types of foreign capital. For this purpose, time series econometrics is used and the results will be guiding the policy makers.