The effect of international capital flows on financial development: Example of developing countries

The aim of this study is to reveal the effect of international capital flows on financial development in developing countries which consist of 21 countries determined by the MSCI (Morgan Stanley Capital International) index. For this purpose, model-1 with annual data from 1995 to 2018; Model-2 with the annual data of 1996-2017 are created. In the analysis progress of the study, first, descriptive statistics of the financial data of the countries are presented and interpreted. In the second stage, LLC, IPS, CIPS panel unit root tests are used. In the third stage of the study, the Panel AMG (Augmented Mean Group) coefficient estimator, which takes into account the cross-sectional dependence of the coefficient estimate for model-1 and model-2, is preferred. At the last stage of the study, the causality relationships between the variables are examined with the Dumitrescu-Hurlin (2012) causality tests developed for heterogeneous panels. As a result of the findings, foreign direct investments and GDP have a statistically significant positive relationship on the financial development index and there is biliteral causality in this association. No statistically significant relationship is found on portfolio investments and trade openness and financial development index. In addition, although there is a statistically significant positive relationship between foreign direct investments and market capitalization, a biliteral causality relationship is found between the variables. On the other hand, a statistically significant negative relationship is found between portfolio investments and market capitalization, but no causality is found. In the models established with trade openness and GDP, no significant relationship is found on market capitalization.