Analysis of the relationship between foreign direct investment and financial development in G20 countries using the system GMM and method of moments Quantile Regression

The impact of foreign direct investment (FDI) on financial systems is of significant importance for both developed and developing countries. The aim of this study is to examine the effect of FDI on financial development within the sample of G20 countries by jointly considering institutional quality and key macroeconomic indicators. In this context, a balanced panel dataset covering the period 2002-2021 is employed. In the analysis, the System-GMM method is used to account for the dynamic structure of financial development, and the MMQR method is additionally applied to investigate whether the effects vary across different levels of financial development. The empirical findings indicate that the average effect of FDI on financial development is not statistically significant. However, quantile regression results reveal that this effect becomes positive and statistically significant in countries with relatively higher levels of financial development. Furthermore, institutional quality is found to support financial development, inflation exerts a negative impact on financial development, and broad money supply emerges as an important determinant of financial development, particularly in developing countries. Overall, the findings suggest that the impact of FDI on financial development is contingent upon institutional and macroeconomic conditions. These results provide important implications for policy design and are expected to make a meaningful contribution to the existing literature.