The Interactive Effect of Financial Development and Foreign Direct Investment on Domestic Investment (Evidence from the East and West Asia, including Iran)

Abstract

Since foreign direct investment has entered into the world's economic literature, countries have sought to attract more of this type of investment by creating appropriate incentive infrastructures. The impact of foreign direct investment on domestic investment may be affected by the different economic conditions of the host country, including their financial development. Accordingly, in this paper, the interactive effect of financial development and direct foreign investment on domestic investment in the East and West Asian countries (including Iran) during the period of 1980-2017 was estimated by using panel data analysis. The results of the research show that the interactive effect of financial development and foreign direct investment on domestic investment in West Asian countries was negative and in the East Asian countries was positive. In other word, developed financial markets and building trust among foreign investors has led to increasing domestic investment in the East Asian countries. Therefore to enhance domestic investment, it is necessary to prepare suitable conditions for financial development and foreign investors entrance to the country.

Keywords

• domestic investment
• financial development
• foreign direct investment
• panel data