Relationship Between Foreign Direct Investment and Economic Growth: What Is the Role of Financial Development? An Empirical Study for 10 Asian Countries

The complementary relationship between foreign direct investment (FDI), financial development, and economic growth which is an important element in promoting economic growth and sustainable development is part of a more attractive and sought-after discussion. This paper focuses on the mediating role of financial development in the effect of foreign direct investment on economic growth by processing a database of a sample of 10 Asian countries over the period from 2000 to 2022. The interest of this study is to establish the maximum threshold of financial development that guarantees the positive returns related to foreign direct investment, taking into account that the banking sector and the stock market reflect financial development indicators. The results of the econometric technique generalized method of moments (GMM) and the threshold regression (TR) show a minimum threshold of financial development of 82.21% for the index of the banking sector and 27.24% for the stock market index. In addition, this study justifies the significant positive contribution of foreign direct investment to economic growth before and after the determination of the regression threshold. However, this effect becomes more important when the threshold of financial development exceeds a defined level. This is true when financial development is measured both through the banking sector and the stock market. It is therefore important for the 10 countries in question to cap the financial system thresholds at agreed milestones in order to fully reap the benefits of foreign direct investment.