Influence of Foreign Portfolio Investment Inflows on Economic Growth in Developing Countries: The Role of Financial Stability

Abstract

The study focuses on the financial stability’s role in the effect of foreign portfolio investment (FPI) inflows on economic growth in developing countries. The data of 55 economies over the period 2010-2021 was analyzed with the Threshold AutoRegressive model (TAR). It is concluded that there is a threshold value of financial stability which makes the effect of FPI on economic growth change. The thresholds found differ when financial stability is measured by FINSTAB1 and FINSTAB2, in case of including or excluding the interaction variable. FPI only positively influences economic growth when financial stability measured by FINSTAB1 is equal to or greater than the threshold value and with the effect of FINSTAB1. FPI also has the same effect on growth when financial stability measured by FINSTAB2 is greater than or equal to the threshold value. This result consolidates the financial stability’s role as an absorbing factor of the positive effect of FPI.