EuroEconomica, Vol 38, No 2 (2019)

Abstract

The study investigated the impact of foreign direct investment (FDI) on exports and also explored the influence of financial development in the FDI-exports nexus in BRICS (Brazil, Russia, India, China, South Africa) nations using panel data analysis (fixed effects and pooled ordinary least squares) with annual data ranging from 1994 to 2015. Whilst it is clear how FDI and financial development are separately linked to exports growth, the role of financial sector development in the FDI-led exports hypothesis has not been addressed in the literature. Moreover, majority of empirical studies on FDI-led exports hypothesis have shied away from BRICS countries (see Table 1) except a study by Sahin (2018). Although the latter investigated the two-way relationship between FDI and international trade in BRICS plus Turkey, their study did not focus on the role of financial sector development in promoting FDI’s influence on exports growth. Both fixed effects and pooled ordinary least squares (OLS) found out that among the five measures of financial development, it is only stock market capitalization that enhanced FDI triggered exports growth in BRICS countries. BRICS nations are therefore urged to implement stock market capitalization enhancement policies in order to experience significant exports growth triggered by FDI.