Analysis of the impact of financial development on Foreign Direct Investment: A Data Mining Approach

Abstract

Several empirical studies have tried to examine the links between Foreign Direct Investment, financial development and economic growth. However, little work has been done to examine the direct relationship between FDI and financial development. Thus, through this study we aim to examine if a well-functioning financial system has an impact on the FDI inflows and outflows of a country using the data mining techniques of attribute analysis, association and classification. We have used data related to 78 countries over a period of 1980 to 2009 for our analysis. The analysis suggests that FDI is not directed into countries that are financially weak and is dependent on both the stock market variables and the banking sector variables. The development of the financial system of the recipient country is an important precondition for FDI to have a positive impact on economic growth.

Keywords: Foreign Direct Investment, FDI, Financial Development, Data Mining