Figure 2: FDI and financial development <!-- Start of picture text --> Outward FDI and source financial development (2003−2006)<br>GERJPN USA WSM LUX<br>KGZ ARM GEOVENSYR MDGLBY ARGBLRROM MEXTURMKDJAMZWE PE ECUIDN SRUSCOL DOMPAK R UKR KENPOLBRA LKAB KAZ BGR PHLCZE SVK LTU IND IRNWSMLVAHUNVNM SVN SAUHRVKWT EGY TUNESTGUY MUSFIN GRC BEL CHLJORITANORISR FRA KORSGPTHAAUSSWEAUTMYSCHNNZLLUX ZAF ESPIRLPRTHKGGBRNLD CHEDNK CANCYPISL KGZ ARMGVSYR MDG LBY E ARGBLR NO ROMMEXTUR MKDJAMZWE PERECUIDNSRBRUSCOL DOM PAKUKR KEN POLBRALKAKAZBGR TTO PHLCZESVKLTINDIRN WSM LVAHUNUVNMSVNSAUHRV KWT EGYTUNEST GUYMUS FIN GRC BEL CHL JORITANORISR FRA KORSGPTHAAUSSWEAUTMYSCHNGERNZLLUXZAFESPIRLPRT HKGGBR NLDCHEDNKCANJPNUSACYPISL KGZ ARMGEO VEN SYRMDGLBYARGBLRROM MEXTUR MKDJAMZWEPERECUIDNSRBRUSCOLDOMPAKUKRKENPOLBRALKAKAZBGR PHL CZESVKLTUINDIRN LVAHUNVNM SVNSAU HRV KWTEGYTUNESTGUYMUSFINGRCBELCHLJORITANORISRFRAKORSGPTHAAUS SWEAUTMYS CHNGER NZL ZAF ESP IRLPRTHKGGBRNLDCHEDNKCANJPNUSACYPISL<br>TTO TTO<br>1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6<br>ln(average private credit to GDP ratio) ln(average private credit to GDP ratio) ln(average private credit to GDP ratio)<br>Inward FDI and destination financial development (2003−2006)<br>ZARSLE AGO MMRLAO SDN YEM AR TZAZMBAZE KHM UGAKGZ M ALB LBYARGDZA GEOVENDG SYRMOZGHANGABLRTJKGMBPNGMEXROMSWZ TURZWEECU BTN PER MDAJAMPRYETHSEN MKD SRBIDNRUSMNG NIC COLGTMUKRPAKKAZKENNPLQATDOMLKAPOLLTUBRABGD PHL CRITTOURYOMNBGRSVKCZEIRNINDGUY SYC HNDSLVBOLHUNHRVSVN MAR SAU VNM LVAKWTTUNEGYEST BHS FIN GRCMUS BEL CHLJOR ITA NOR ISRFRAKORSGPTHAAUSSWEMLT AUT MYSLUXNZL CHNGER ZAFESPIRL PRT HKGGBRNLDCHEDNKCANISLJPNUSACYP ZAR AGOMMRLAOSDNYEMARMTZAZMBAZEKHM UGA KGZMDG ALB LBYARGDZAGEOVENSYRMOZGHANGABLRTJKPNGMEXROMSWZ TUR ECUPERMDAETHSENMKDSRBIDN RUS MNGNICCOLGTMUKRPAKKAZKENNPLQAT DOM LKAPOLLTUBRABGDPHL CRI TTOURYOMNBGRSVKCZEIRN IND HNDSLVBOLHUNHRVSVNMARSAUVNMLVAKWTTUN EGY ESTFIN GRC MUS BEL CHLJORITA NOR ISRFRAKORSGPTHA AUS SWEMLTAUTMYSLUX NZL CHNGER ZAF ESPIRLPRTHKGGBRNLDCHEDNKCANISLJPNUSACYP ZARSLEAGOMMRLAOSDNYEMARMTZAZMBAZEKHMUGAKGZMDG ALB LBYARGDZAGEOVENSYRMOGHA NGA BLR TJK GMBPNG MEX ROMSWZTUR Z ECUBTNPERMDAJAMPRYETHSENMKDSRB WE IDNRUSMNGNICCOLGTM UKRPAK KAZKENNPLQATDOMLKA POL LTUBRABGDPHLCRITTO URY OMNBGRSVKCZEIRNINDGUY SYC HNDSLVBOLHUNHRVSVNMAR SAU VNM LVA KWTTUNEGYEST BHSFIN GRCMUSBELCHLJORITA NOR ISRFRAKORSGPTHAAUS SWE MLTAUTMYSLUXNZLCHNGERZAFESPIRLPRTHKG GBRNLD CHE DNK CANISLJPNUSACYP<br>SLE GMBZWEBTNJAMPRYGUYSYCBHS<br>1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6<br>ln(average private credit to GDP ratio) ln(average private credit to GDP ratio) ln(average private credit to GDP ratio)<br>12 8<br>6<br>10<br>6<br>8 4<br>6 4<br>4 2<br>ln(FDI flows) 2<br>2<br>0 ln(number of FDI projects ) 0 ln(average value of FDI projects) 0<br>12 8<br>6<br>10<br>6<br>8<br>4<br>6 4<br>ln(FDI flows) 4 2<br>2<br>2<br>ln(number of FDI projects )<br>ln(average vlue of FDI projects)<br>0 0 0<br><!-- End of picture text --> Note: Greenfield FDI data. Cumulated values over the period 2003-2006.

# **5 Results**

Tables 2-3 contain our results on the overall effects of SFD and DFD on the relative volume of bilateral greenfield FDI in financially vulnerable sectors. We then decompose these overall effects into specific effects in Table 4, where we also distinguish between the extensive and intensive margins of FDI.

## **5.1 The overall effects of financial development on bilateral FDI**

### **5.1.1**

### _Baseline results_

Column (1) of Table 2 shows that the coefficients on the two interaction terms are large, positive, and statistically significant at the 1% level. Higher financial development, on both source and destination sides, increases the relative volume of bilateral FDI in financially vulnerable sectors. These effects are economically substantial.

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