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Do financial inclusion, stock market development attract foreign capital flows in developing economy: a panel data investigation

1 School of Business and Economics, United International University, Bangladesh
2 School of Economics, Wuhan University of Technology, China

Do financial inclusion and stock market development play the deterministic role of attracting foreign capital flows in developing countries. With this study, we tried to figure out the answer by investigating the magnitude of financial inclusion and stock market development towards capital flows in the economy considering a panel of 58 developing countries for the span of 1993–2017. Dynamic panel System-GMM estimation was performed by decomposing the development and degradation namely, positive and negative shocks in financial inclusion and stock market development. Study findings ascertain the asymmetric relationship between financial inclusion, stock market development, and cross-broader capital flows in developing countries. We also observed positive shock in financial inclusion and stock market development positive linked with cross-broader capital flows. In particular, development in financial inclusion in the financial system encourages foreign capital flows in the form of FDI, on the other hand well developed and efficient financial market particularly stock market development encourage the positive trend in foreign portfolio investment. The study also revealed that past behavior of foreign capital flows could consider as the future predictor for foreign capital flows in recipients countries. Dumitrescu and Hurlin (2012) Panel Causality Test was performed and estimation unveiled bidirectional causality between stock market development and capital flows and unidirectional causality from financial inclusion to foreign capital flows in the short-run.
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