Foreign Capital Inflows and Financial Development: The Moderating Effects of the Governance Climate and Human Capital across the MEDA Region
DOI:
https://doi.org/10.63385/jemm.v2i2.482Keywords:
Foreign Capital, Financial Development, Governance Climate, Human Capital, MEDA RegionAbstract
In the globalized world, there is a closed relationship between foreign capital inflows (CI) and financial development (FD) of a country. Therefore, this study aims to investigate the relationship between FD and CI across the Southern and Eastern Mediterranean countries (MEDA region), covering the period 2000–2019, since MEDA transitional economies are experiencing a new phase of their development-paths and integration into the global economy through value chains, especially in relation to European partners. By using as moderator factors an original composite index of governance climate (GC) and the mean years of schooling as proxy variables for institutional quality and human capital (HC) formation, respectively, the study brings a significant contribution to the existing body of literature on the relationship between CI and FD. For the empirical analysis, fixed-effects models with robust standard errors and Bayesian mixed-effects models were implemented. Empirical findings show that FD has a statistically significant negative association with foreign investment and remittance inflows. However, its effect is substantially attenuated or reversed by interaction terms with GC and HC. As policy implications, the study suggests that a sounder governance climate and more skilled human capital can enhance the benefits of the MEDA countries’ financial development and attract more foreign capital inflows across the whole MEDA region.
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