Dynamic common correlated effects of financial inclusion on foreign direct investment: Evidence from East-Asia and Pacific countries

This research explores the dynamic common correlated effects of financial inclusion on foreign direct investment (FDI) in East Asia and Pacific (EAP) countries. Traditional econometric methodologies overlook cross-sectional dependence and heterogeneity among countries, resulting in biased estimates. As a result, we use a unique method called DCCE, which can effectively address these problems. The short run and long-run estimates reveal that financial inclusion positively and significantly influences FDI in higher-income and overall EAP countries. Furthermore, in lower-income EAP countries, financial inclusion has an insignificant correlation with FDI, which becomes significant when an interaction term for institutional performance and financial inclusion is included. Hence, governments and policy makers in EAP economies should try to increase financial inclusion in order to attain an optimal and sustainable level of FDI inflows to enhance economic growth. Copyright & COPY; 2022 Borsa Istanbul Anonim S, irketi. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Automated summary

This research investigates the impact of financial inclusion on foreign direct investment (FDI) in East Asia and Pacific (EAP) countries. Traditional econometric methods fail to consider cross-sectional dependence and heterogeneity among countries, leading to biased estimates. Using the unique method called DCCE, the study finds that financial inclusion positively and significantly affects FDI in higher-income and overall EAP countries. In lower-income EAP countries, financial inclusion has an insignificant correlation with FDI, which becomes significant when an interaction term for institutional performance and financial inclusion is included. Therefore, policymakers should focus on increasing financial inclusion to attract FDI and promote economic growth in EAP economies.