Date of Award
Doctor of Philosophy (PhD)
Dr. Gokee A. Soydemir
Dr. Daniel Sutter
Dr. Hale Kaynak
This dissertation consists of two essays on financial sector performance in Latin America. These two essays complement each other so that, when placed together, they are expected to provide policymakers with guidelines on how to design appropriate financial sector reform strategies in an attempt to promote long-term economic development, and thus to attract more foreign direct investment (FDI) inflows not only for Latin American countries, but also for developing countries in general.
Chapter one investigates the extent to which the short and the long-run relationship between financial development and economic growth exists in Latin America. It focuses on two major aspects of financial development that can enhance growth: stock market and banking sector. Specifically, what role does the financial sector play in the economic growth process? What effect, positive, negative or zero, has financial development exerted on economic growth? Have the stock market and banking sector development indicators jointly entered the growth regression significantly? What type of causality, uni-directional or bi-directional, exists in the finance-growth nexus? Utilizing panel data methods and applying Granger causality tests within a framework of panel cointegration and error correction model, we attempt to answer the above questions empirically and shed some light on the roles of financial development as well as other conditional variables in determination of economic growth.
Chapter one recommends that the real sector of Latin American economies should be developed further in order to sustain the development of the banking sector. On the other hand, the empirical results suggest that there is considerable evidence of bi-directional causality between stock market development and economic growth when stock market development indicators are used as proxies for financial development. Based on these results, government policies designed to enhance the efficiency of the stock markets and economic growth will be mutually beneficial in Latin America and other regions at the same stage of financial development such as East Asia, Africa, and Eastern Europe.
Chapter two examines the domestic and international determinants of FDI in Latin America. In particular, what factors led to the upsurge in FDI into the region? Why are some countries more successful than others in attracting FDI? Whether factors that affect FDI in developing countries affect countries in Latin America differently. Whether countries with well-developed financial markets attract more FDI inflows. Whether FDI flows to developing countries are determined by domestic and/or international factors. This chapter attempts to answer the above questions based on the experience of 14 Latin American countries from 1978 to 2007.
The empirical findings in this chapter show that both domestic and international factors have been important determinants of FDI inflows to Latin America. Therefore, chapter two recommends that emphasis in the short and medium term should be focus on reforming investment regulatory framework to remove or reduce FDI restrictions, implementing policies that promote macroeconomic economic stability, and improving the educational and physical infrastructure. While, in the long-run, more FDI can be attained by persisting support for FDI liberalization through bilateral or multilateral means, continuing of the privatization process, and implementing appropriate monetary and fiscal policies for economic reforms and international integration with the world economy, thereby improving the attractiveness of a nation as a destination for FDI. Further analyzing the relationship between FDI and financial development, the empirical findings provide supporting evidence that a well-developed financial sector can represent a source of absorptive capacity in the host country which may enable these countries to absorb the positive impact of FDI. Therefore, the evidence suggests that Latin American countries should continue to stimulate and improve financial sector development in the economy to make it more attractive for foreign investors.
The Granger causality results show that the causal link between FDI and banking sector development is uni-directional, suggesting that the development of banking sector in Latin American countries can attract more FDI. We also provide evidence that the link between FDI and stock market development indicators is bi-directional. Therefore, the evidence suggests that Latin American countries should continue to stimulate and improve financial sector development in the economy to make it more attractive for foreign investors.
University of Texas-Pan American