A Pre-Condition for Fdi for Spillover Effect in Egypt

Faculty of Management Technology

Working Paper Series

Financial Development

A Pre-Condition for Foreign Direct Spillover Effects in Egypt by Nevine M. Eid

Working Paper No. 12

July 2008

Financial Development

A Pre-Condition for Foreign Direct Spillover Effects in Egypt

by Nevine M. Eid July 2008

Abstract

The paper investigates the hypothesis that financial development is the leading channel through which the foreign direct investment (FDI) positive spillovers accelerate growth rate. A simultaneous equations model (SEM) was specified using quarterly data within period (1993-2005). The estimated model evidenced a unidirectional causality from economic growth towards FDI. However, the reverse equations traced the indirect impact of the FDI on economic growth through its dualistic influence on both the financial sector as well as domestic investment. Therefore, further financial liberalization is highly recommended if and only if the planned institutional and regulatory reforms are politically supported. Then, financial derivatives were proposed as a part of the liberalization scenario from one side and as a tool towards managing risks in the Egyptian financial market from the other side.

JEL classification

G32, E22, F36

Keywords

Financial Development, Foreign Direct Investment, Financial Integration, Financial Instruments

Faculty of Management Technology German University in Cairo Al Tagamoa Al Khames 11835 New Cairo City – Egypt nevine.eid@guc.edu.eg

“Economic evolution is a continuity of cause and effect. It is a scheme of blindly cumulative causation, in which there is no trend, no final term, no consummation…, a theory of the process of consecutive change, realized to be self-continuing or selfpropagating and to have no final term”, Veblen (1919, pp.36-37).

1. Introduction

Financial development has been highlighted recently as a prerequisite for the positive impact of foreign direct investment and private equities,...