“Role of financial sector development in foreign direct investment inflows in BRICS”

This study examined the influence of financial sector development on FDI inflows in BRICS using panel data (1991–2020) analysis methods. The influence of the complementarity between the financial sector and human capital development on FDI inflows was also examined in the context of BRICS using the same data set and econometric methodologies. The advantage of this study is that the results are used as a basis by BRICS countries to develop financial sector development policies that attract significant FDI inflows. Financial sector development (model 2 and 3 of the pooled ordinary least squares approach) significantly enhanced FDI inflows. Human capital development (model 3 of the fully modified ordinary least squares) was found to have had a significant positive effect on FDI inflows in BRICS group of countries. The combination between financial and human capital development under (1) model 1 of the fully modified ordinary least squares and (2) models 2 and 3 of the pooled ordinary least squares (POLS) was observed to have significantly enhanced FDI inflows in BRICS. The study outlines the financial and human capital development recommendations that need to be implemented to facilitate more FDI inflows.


Abstract
This study examined the influence of financial sector development on FDI inflows in BRICS using panel data (1991-2020) analysis methods. The influence of the complementarity between the financial sector and human capital development on FDI inflows was also examined in the context of BRICS using the same data set and econometric methodologies. The advantage of this study is that the results are used as a basis by BRICS countries to develop financial sector development policies that attract significant FDI inflows. Financial sector development (model 2 and 3 of the pooled ordinary least squares approach) significantly enhanced FDI inflows. Human capital development (model 3 of the fully modified ordinary least squares) was found to have had a significant positive effect on FDI inflows in BRICS group of countries. The combination between financial and human capital development under (1) model 1 of the fully modified ordinary least squares and (2) models 2 and 3 of the pooled ordinary least squares (POLS) was observed to have significantly enhanced FDI inflows in BRICS. The study outlines the financial and human capital development recommendations that need to be implemented to facilitate more FDI inflows.

Kunofiwa Tsaurai (South Africa)
Role of financial sector development in foreign direct investment inflows in BRICS

INTRODUCTION
The positive impact of FDI inflows in the economy was espoused by early theorists such as Solow (1956), Swan (1956), Kumar and Pradhan (2002), Sanchez-Robles (2002), Calvo and Romer (1986), and Lucas (1988). The UNCTAD report (UNCTAD, 2012) also noted that one of the major sources of growth in developing nations has been FDI inflows. There is consensus in the literature that FDI inflow is good for economic growth. However, financial sector development enhanced FDI inflows' influence on economic growth (Seenivasan, 2014), a view which was supported by Asong (2014). Choong (2012) argued that financial sector development provides a pathway through which economic growth is enhanced by FDI inflows. It appears there is consensus in the literature that financial sector development is a bridge through which FDI inflows influence economic growth.
What is still contentious is the direct influence of financial sector development on FDI inflows. Several recent empirical studies were done on the influence of financial sector development on FDI inflows, namely

LITERATURE REVIEW
The economic efficiency, allocative channel and liquidity easing are the three rationales that describe the effect of financial sector development on the inflow of FDI (Ezeoha & Cattaneo, 2012). Proponents of economic efficiency, Bartels et al. (2009), noted that transaction costs and information flow problems are reduced by the developed financial system, hence attracting FDI inflows. Kaur et al. (2013), the supporters of the allocative channel theoretical rationale, noted that a developed financial system is an efficient resource allocator in the economy, thereby increasing the productivity of foreign capital. The liquidity easing theoretical rationale argued that a highly developed financial sector avails liquidity that enables quicker settlement and trading of financial assets. Foreign investors are normally attracted by such an environment.
Empirical studies that noted that financial sector development enhances FDI inflows are described as follows. Using the dynamic generalized method of moments (GMM), Tsaurai and Makina (2018) investigated the influence of banking and stock market development on transitional markets. They found out that higher banking sector and stock market development above levels of threshold enhanced significant FDI inflows in emerging economies.
Using Latin American countries as a focus of the study, Hajilee and Nasser (2015) employed the error correction model (ECM) to investigate the correlation between FDI inflows, stock market and banking sector development. Banking sector development enhanced FDI inflows, whilst FDI inflows and stock market development affected each other. Kamasa et al. (2020) explored the effect of financial reforms on FDI inflows in Ghana using the autoregressive distributive lag (ARDL). The study noted that financial sector reforms had a significant enhancing effect on FDI inflows. Using the GMM methodology, Sghaier and Abida (2013) examined in North African countries whether a developed banking sector influenced FDI inflows. A developed banking sector was found to be a necessity in enabling FDI inflows to have an economic growth enhancing influence.
Chee and Nair (2010) used panel data analysis to examine the influence of financial sector development on FDI inflows in Asia and Oceania. Financial sector development was noted to have enhanced FDI inflows' positive influence on the economy. In 78 countries worldwide, Korgaonkar (2012) investigated the relationship between the strength of the financial system and FDI inflows using panel data analysis approach. The study noted that financially weak economies repel FDI inflows.
Using developed countries and emerging markets as a unit of analysis, Nor et al. (2013) employed panel data analysis to explore if there is any meaningful relationship between the quality of the banking sector and FDI inflows. The study observed that banking sector quality enhanced FDI inflows's positive influence on economic growth.
Veselinovic and Despotovic (2022) used Central and Eastern European countries as an area of focus to find out the relationship between FDI inflows and financial sector development. Panel causality tests (Dumitrescu-Hurlin) were employed for data analysis purposes. The study noted that FDI inflows were enhanced by a well-regulated financial system. In the case of ASEAN-6 countries, Gitanadya and Annisa (2018), using panel data analysis, investigated the interrelationship between FDI inflows and financial sector development. It was noted that the amount of FDI inflows to ASEAN countries had a positive impact on financial sector development levels. Dellis (2018), using a GMM approach, estimated the linkage between financial sector development and FDI inflows in emerging and advanced economies. Financial sector, which is efficient, attracted a significant number of FDI inflows into emerging markets. Employing random effects methodology, Shah (2016) explored the relationship between FDI inflows and financial sector development in Middle East and North African (MENA) countries. Financial sector development was noted to be a major predictor of FDI inflows in the MENA region. The two-system GMM approach was used by Acquah and Ibrahim (2019) to examine the relationship between the financial sector and FDI inflows in Africa. They noted that financial sector development had a negative impact on FDI inflows' influence on economic growth in the African context. Keykanloo  Sahin and Ege (2015) employed the bootstrap causality analysis to investigate the correlation between FDI inflows and financial sector development in Greece and its neighbouring countries. A feedback causality relationship between FDI inflows and financial sector development was found in the case of Turkey. Using ARDL, Sasmaz and Gumus (2018) explored the linkage between financial sector development, economic growth and FDI inflows in Turkey. Both banking sector development and FDI inflows influenced each other in Turkey. On the other hand, these two variables enhanced economic growth in the context of Turkey.
Another group of empirical researchers noted that certain factors should be available in the host country before financial sector development significantly enhances FDI inflows (the non-linearity rationale). Empirical researchers who agree with this theoretical rationale are Bahri  Using ordinary least squares, Ozili et al. (2020) examined the correlation between banking sector performance and FDI inflows in United Arab Emirates (UAE). The complementary effect between FDI inflows and bank efficiency was found to have reduced the non-performing loans. Ljungwall and Li (2007) used GMM to explore the causality between FDI inflows and different financial sector development measures in Chinese provinces. The complementarity between different measures of financial sector development and FDI inflows was found to have an enhancing effect on economic growth across Chinese provinces.
Bahri and Nor (2019) used the vector error correction model (VECM) and ARDL approaches to find out the linkage between financial sector development and FDI inflows in ASEAN countries. Their study noted that financial sector development influenced FDI inflows in a U-shaped format. The system GMM approach was employed by Nkoa (2018) in the African context to find out the nature of the correlation between FDI inflows, growth and financial sector development. The growth of the economy's positive influence of FDI inflows was enhanced by financial sector development in Africa. In Sub-Saharan African countries, Adeniyi et al. (2015) used panel data analysis to explore the interactions between financial sector development, economic growth, and FDI inflows. In the case of Sub-Saharan African nations, financial sector development enhanced economic growth effects of FDI inflows. Kaur et al. (2013) explored the relationship between financial sector development and FDI inflows using panel data analysis in BRIC countries (Brazil, Russia, India, and China). FDI inflows were found to have been attracted by the stock market and banking sector development. Stock market capital capitalization and banking sector size had a significant positive impact on FDI inflows.
Existing empirical studies that examined the influence of financial sector development on FDI inflows produced results that are inconclusive, mixed, divergent and far from showing signs of convergence. These conflicting results indicate that the effect of financial sector development on FDI inflows is far from reaching a consensus. The current study embarked on this topic to make its own unique contribution on the subject matter. Kpodar and Goff (2012) argued that personal remittances inflow removes obstacles to FDI inflows inflow into the host country. On the other hand, according to Kpodar and Goff (2012), more private sources of funding (personal remittances) have a downward impact on FDI inflows. Personal remittances received (% of GDP) are the measure of REMIT used in this study. Personal remittances are expected to affect FDI inflows either way.
Wang and Xie (2009) argued that enhanced development of infrastructure enhances host countries' ability to benefit from technology related to FDI inflows. Quality infrastructural development supports domestic firms-FDI inflows linkages and support new technology framework from FDI inflows (Craigwell, 2012). The proxy of infrastructural development used in this study is individuals using internet (% of population). FDI inflows is expected to be enhanced by infrastructural development.
Consistent with Denisia (2010, p. 108), trade openness facilitates foreign capital mobility between countries and is also a locational advantage of FDI inflows. Total of exports and imports (% of GDP) is the measure of trade openness employed in this study. Denisia (2010) argued that one of the locational advantages of FDI inflows is economic growth. The study noted that foreign investment flowing into the host country is due to higher expected returns that normally occurs in an economically sound country. Gross domestic product (GDP) per capita is a measure of economic growth used. Economic growth's influence on FDI inflows is expected to be positive.
According to Solow (1957), increased savings attract more foreign investment through their ability to enhance domestic investment and growth (which is a locational advantage of FDI inflows). The measure of savings used in this study is gross domestic savings as a ratio of GDP. Savings' effect on FDI inflows is anticipated to be positive.

METHODS
Using panel data (1991-2020) extracted from World Development Indicators, this study explored the influence of financial sector development on FDI inflows in the BRICS bloc of countries.
The general model specification used in this study is represented by equation (1) Transformed into an econometric format, equation (1) becomes equation (2) Six control variables of the FDI inflows function used in this study are described next. Host country's high level of human capital development attracts more FDI inflows through its ability to enable both domestic and foreign companies to quickly utilize state of the art technology (Craigwell, 2012). Human capital development is also FDI inflows' locational advantage, according to Dunning (1979). Human capital development index is expected to enhance FDI inflows. Human capital development index is the proxy used for HCD.

RESULTS
Figures 1 and 2 present and discuss the financial sector development and FDI inflows trends for BRICS using annual data (1991-2020). The purpose of the trend analysis is to find out if there is an a priori relationship between financial sector development and FDI inflows before the main data analysis is carried out.    Note: ***, **, and * represent 1%, 5% and 10% significance levels, respectively.    Table 4 presents the results of the panel stationarity test. Table 5 presents the results of the panel co-integration test.
Fixed effects, FMOLS and pooled OLS are the three econometric approaches employed to analyze the data (see results in Tables 6, 7    Note: ***, **, and * indicate 1%, 5% and 10% significance levels, respectively.  Stead (2007) noted that the correlation size above 70% indicates the existence of a multi-collinearity problem. The correlation between infrastructural development and economic growth confirmed that there is a multi-collinearity problem between the two variables (see Table 2). The disadvantage of correlation analysis is it fails to establish the direction of causality of one variable on another. Table 3 shows that data for every variable is abnormally distributed. This shows that the probability of the Jarque-Bera criteria is zero, consistent with Tsaurai and Ngcobo (2018). It is also evidenced by the fact that all the variables are skewed to the right, except for human capital development. Table 3 indicates that standard deviation of economic growth data (3 829.02), a figure which exceeds 100, is an indication that outliers exist in the data set, which is in line with Tsaurai and Ngcobo (2018). All the data set had to first be transformed into natural logarithms prior to main data analysis, in support of Aye and Edoja (2017). Under the fixed effects (Table 6) and FMOLS (Table  7), financial sector development non-significantly enhanced FDI inflows across all the three models, results which were also supported by the pooled OLS (Table 8) under the model 1 approach. Pooled OLS methodology noted that the positive influence of financial sector development on FDI inflows was significant under model 2 and 3. These results generally mean that FDI inflows were enhanced by financial sector development in the context of BRICS, which is in line with the three theoretical rationales of financial sector development-FDI inflows hypothesis enunciated by Ezeoha and Cattaneo (2012) in Section 1 of this paper.
Except for model 3 under the FMOLS (Table 7) approach (which observed a significant positive relationship from human capital development towards FDI inflows), human capital development's impact on FDI inflows was noted to be non-significantly positive across all the three econometric approaches under the three models. These results indicate that human capital development increases FDI inflows, consistent with higher levels of developed human capital Whilst pooled OLS and fixed effects indicate that FDI inflows were negatively affected by economic growth across all the three models, FMOLS shows that FDI inflows were enhanced by economic growth under models 1, 2 and 3.
The results on savings are quite mixed. Pooled OLS shows that savings significantly enhanced FDI inflows across all the three models, fixed effects (1, 2 and 3) shows that savings had an insignificant negative influence on FDI inflows. FMOLS produced mixed results on the relationship between savings and FDI inflows.

CONCLUSION
The paper explored financial sector development's influence on FDI inflows using BRICS as a case study. The impact of the complementarity variable (financial sector x human capital development) on FDI inflows was also a subject of investigation using the same unit of analysis. Only the pooled OLS methodology (models 2 and 3) shows that FDI inflow into BRICS was significantly enhanced by financial development. FDI inflow into BRICS was also enhanced significantly by the complementarity variable (see pooled OLS under models 2 and 3, and model 1 of FMOLS). These results can be used by BRICS to develop and implement financial sector and human capital development policies geared at enhancing FDI inflows. Further empirical research could be done on financial and human capital development threshold levels required to trigger significant FDI inflows into BRICS.