This study examines the role of banking development quality in the
FDI-growth nexus from 1998 to 2009. Banking development quality is
measured using two standardized intermediation cost indicators and an
index of banking development quality that is constructed based on the
following indicators: overhead costs to total assets and net interest
margin. The results for developed countries show that, on its own, FDI
is negatively related to economic growth. However, when FDI is
interacted with a banking development quality index, the quality of
banking development is found to play a positive role in influencing the
effects of FDI on economic growth. This suggests that the quality of
banking development serves as an absorptive capacity that allows
developed countries to benefit from the positive growth effects of FDI.
On the contrary, for emerging countries, the findings indicate that
banking development quality plays no role in influencing the impact of
FDI on economic growth. This implies that the quality of banking
development in emerging countries has yet to reach a level that allows
it to importantly influence the growth effects of FDI. [ABSTRACT FROM
AUTHOR]