Abstract

The purpose of this paper is to investigate whether foreign direct investment (FDI) can stimulate financial development or not. Financial markets have not been expanded in many developing countries despite their proven positive effect on economic growth. Although the impact of financial markets and FDI on economic growth has been investigated in three voluminous and parallel lines of studies, no research has examined the combined effect of foreign investment on financial development up to now. This study investigates the causal links between FDI and financial development using annual data for a panel of eight developing countries and vector autoregressive (VAR) model for 8 countries of D-8 group, during the period of 1976-2005.

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