The relationship between foreign investment, financial development and economic growth

The aim of this study is to examine the possible effects of foreign investments (foreign direct investment and foreign portfolio investments) and financial development on economic growth. Also, the factors affecting economic growth different from foreign investment and financial development are investigated and how these effects change in different periods and countries classified according to different income levels. For the purpose of the study, the data of 133 countries between 1990 and 2017 were investigated using the system generalized moments method developed by Arellano and Bover / Blundell and Bond, the dynamic panel data estimator and Hayes' multiple mediation analysis. According to the results of the study, foreign direct investment, foreign portfolio investments and financial development increase economic growth. However, a certain level of financial development in the country is necessary to increase economic growth in foreign direct investments and foreign portfolio investments. Also, the non-linear "inverse-U" effect of financial development on economic growth was determined. Financial development has a positive impact on growth to a certain extent. After exceeding this level, the increase in financial development has a negative effect on growth. In the study, when the countries are separated by income level, it is concluded that foreign direct investment increases economic growth statistically in middle-high and middle-low income countries. However, the effect of direct foreign investment on economic growth is statistically insignificant in high-income and low-income countries. Foreign portfolio investments increase economic growth statistically only in high-income countries. Foreign direct investments entering the country are found to indirectly increase economic growth by affecting financial markets and domestic investments, while there is no indirect effect of foreign portfolio investments on economic growth. Foreign portfolio investments support economic growth through financial markets. As foreign direct investment and foreign portfolio investments increase economic growth, the factor affecting the entry of foreign investments into the country becomes important. Countries with a surplus economic growth rate, a sufficient level of financial development, and a higher level of trade openness will attract more foreign direct investment. Similarly, countries with a high economic growth rate and a sufficient level of financial development will attract more portfolio investments. However, the exchange rate, which is an indicator of macroeconomic stability, negatively affects foreign portfolio investments entering the country.