Document Type : Research Paper

Authors

1 Assistant Professor of Economics, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran

2 M.A. in Energy Economics, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran.

Abstract

INTRODUCTION
Financial globalization since the mid-1980s has increased capital flows between industrialized and developing countries. However, foreign direct investment and foreign portfolio investment are the primary and influential factors of globalization. Also, according to theoretical literature, there is a relationship between financial globalization and economic growth of countries dependent on their degree of development, geographical conditions, size of the country in trade, and ..., which may be positive or negative in some cases. On the other hand, sustainable economic growth is one of the preconditions for attracting and exploiting foreign capital. This paper tries to consider the importance of international capital flows (including foreign direct investment and foreign portfolio investment) as the symbol of financial globalization, investigate the interaction between financial globalization and economic growth in a growth model for D8 countries.
METHODOLOGY
In this regard, the specified econometric model is including three equations for economic growth, foreign direct investment, and foreign portfolio investment. Then for estimating the model, the required data are gathered for D8 countries during 1995-2015, and simultaneous equations method in panel data approaches have been used to evaluate the research problem.
FINDINGS
In the specified economic growth equation, the estimated results show a long-run, positive, and statistically significant relationship between economic growth and both types of international investment flows. However, according to the estimated coefficients, the effect of the foreign direct investment on economic growth is more than the foreign portfolio investment in the selected countries during 1995-2015. This result indicates that foreign investment can be a determinant factor for the economic growth in the specified countries. Also, the population growth rate and the fixed capital accumulation positively affect economic growth, while the effect of the real exchange rate and the inflation is negative. In the estimated equation for foreign direct investment, the economic growth, the real exchange rate, and the difference between domestic and foreign interest rates positively affect this variable.
In contrast, the coefficient of other variables, including the portfolio investment, the population growth, and the fixed capital accumulation, is negative, and the results indicate substitution between different types of capital flows. Finally, in the portfolio investment equation, the coefficient of the economic growth rate and the number of internet users is positive, and the coefficient of the foreign direct investment and inflation rate are negative. Hence, economic growth is a determinant factor to absorb foreign investment flows. 
CONCLUSION
As a policy recommendation, policymakers should pay special attention to foreign investment flows, especially foreign direct investment. Using suitable and necessary policies, try to promote infra-structures and capacities of their country to absorb foreign direct investment and generate sustainable economic growth.

Keywords

Main Subjects

Agarwal, J.P. (1980). Determinants of foreign direct investment: a survey. Weltwirtschaftliches Archiv, 106, 739–77. ##Asiedu, E. & Salehi Esfahani, H. (2003). The Determinants of Foreign Direct Investment Employment Restrictions. Available at SSRN: https://ssrn.com/abstract=835345 or http://dx.doi.org/10.2139/ssrn.835345. ##Bayar Y. (2014), Financial Development and Economic Growth in Emerging Asian Countries, Asian Social Science, 10(9), 1-17. ##Bekaert, G. & Harvey, C. R. (1995), Time-varying World Market Integration, Journal of Finance, 50, 403-444. ##Bekaert, G. & Harvey, C. R. (2000), Foreign Speculators and Emerging Equity Markets, Journal of Finance, 55, 565-614. ##Botric, V., Sisinacki, J. & Skuflic, L. (2006), Road Infrastructure and Regional Development: An Evidence From Croatia, ERSA conference papers ersa06p88, European Regional Science Association. Available at: https://ideas.repec.org/p/wiw/wiwrsa/ersa06p88.html##Chirila–Donciu E. (2013), Globalization and Foreign Direct Investments. CES Working Papers, 5(2), 177-186. ##Vlahinić-Dizdarević, N., & Biljan-August, M. (2005, May). FDI performance and determinants in southeast European countries: evidence from cross-country data. In th International Conference on Enterprise in Transition, May (pp. 26-27).[Online] Available: http://bib.irb.hr/prikazi-rad?&lang=en&rad=203502. ##Dunning, J.H. (1994), Multinational enterprises and the globalization of innovatory capacity, Research Policy, 23(1), 67-88. ##Durham, B.J. (2004), Absorptive Capacity and the Effects of Foreign Direct Investment and Equity Foreign Portfolio Investment on Economic Growth, European Economic Review 48(2), 285-306. ##Grčić, B., & Babić, Z. (2003). The determinants of FDI: evaluation of transition countries attractiveness for foreign investors. In 5th International Conference Enterprise in Transition. Tučepi. ##Jensen, M.C. & Meckling, W.H. (1978). Can the Corporation Survive? Financial Analysts Journal, 34(1), 31-37. ##Levine, R. (1997), Financial development and economic growth: Views and agenda, Journal of Economic Literature, 35(2), 688-726. ##Loree, D.W. & Guisinger, S.E. (1995), Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment, Journal of International Business Studies, 26(2), 281–299. ##Lucas, R.E. (1988), On The Mechanics of Economic Development, Journal of Monetary Economics, 22, 3-42. ##Mishkin, F.S. (1996), The Channels of Monetary Transmission: Lessons for Monetary Policy, NBER Working Papers 5464, National Bureau of Economic Research, Inc. Available: https://ideas.repec.org/p/nbr/nberwo/5464.html##Morisset, J. (2000), Foreign Direct Investment in Africa : Policies Also Matter, Policy Research Working Paper; No. 2481. World Bank, Washington, DC. © World Bank. ##Nunnenkamp, P. (2002). Determinants of FDI in Developing Countries: Has Globalization Changed the Rules of Game? Kiel Working paper No. 1122, Keil Institute of World Economics,Germany. [Online] Available: http://www.ifw-members.ifw-kiel.de/publications/de... the-game/kap1122.pdf ##Prasad, E., Rogoff, K., Wei, S.J. & Kose, M.A. (2003), Effect of Financial Globalization on Developing Countries, Some Empirical Evidence, IMF Occasional Paper 220 (Washington, International Monetary Fund). ##Ramazan D. & Kiani A. K. (2012), Analyzing the Relationship between FDI, Trade Openness and Real output Growth: An ECM Application for Pakistan, International Journal of Basic and Applied Science, 1(2), 813-819. ##Romer, P.M. (1986), Increasing Returns and Long-Run Growth, The Journal of Political Economy, 94(5), 1002-1037. ##Savari, A., Fatrus, M., Haji, G., & Najafizadeh, A. (2020). Asymmetric analysis of the effect of energy consumption and financial development on economic growth in Iran: Application of nonlinear ARDL method. Quarterly Journal of Quantitative Economics(JQE), 17(3), 69-90. doi: 10.22055/jqe.2019.28107.2012##Schneider, F., & Frey, B. S. (1985). Economic and political determinants of foreign direct investment. World Development, 13, 161–175. http://dx.doi.org/10.1016/0305-750X(85)90002-6. ##Shakeri, A. (2011), Macroeconomics, Rafe Press [In Persian]. ##Torabi, T. & Mohammadzadeh Asl, N. (2010). Analyzing the Role of Globalization in Attracting Foreign Investment and Affecting the Economic Growth, Journal of Economic Research, 10(2), 217-240. Avalable at: https://joer.atu.ac.ir/article_2775.html?lang=en [In Persian]. ##Taylor, C. T. (2000). The Impact of Host Country Government Policy on US Multinational Investment Decisions. World Economy, 23(5), 635-647. EBSCOhost. http://dx.doi.org/10.1111/1467-9701.00294. ##UNCTAD (2015), World Investment Report. PDF. ##Wheeler, D. & Mody, A. (1992), International Investment Location Decisions: the Case of Us Firms, Journal of International Economics, 33(1-2), 54 – 76.