Governance, Financial Development, and Investment: The Role of Globalization

Abstract

Private investment is known for its role in the socio-economic and technological improvement of a developing country. At the same time, the developing economies are characterized by a low rate of investment, poor quality of governance, and bad financial market situation. The study investigates the impact of governance, financial development, and globalization on investment in the developing economies. Data—covering a panel of 60 developing economies for the time period2002 to 2016—was estimated through the Generalized Method of Moments (GMM) technique.  The governance, financial development, and inflation had a positive impact whereas the exchange rate had a negative impact on investment. The overall index of globalization, as well as its social and economic dimensions, also had a positive impact on investment. For the low-income developing economies, the overall index of globalization and each of its three dimensions had a positive impact on investment. While, for the high-income developing economies, the overall index of globalization had positive, but its political dimension had a negative but significant impact on investment. In the case of developing economies, private investment is an outcome of improvement in the situation regarding governance, financial markets, and socioeconomic & political ties with the rest of the world.