The effect of foreign direct investment on financial development: Empirical evidence from bahrain

Abstract

The aim of this paper is to analyze the relationship between foreign direct investments and Þnancial development in Bahrain. The estimation Þnancial development effects was performed for the period 1978 to 2015, which covers the political conßicts that recently happened in Middle East area (Arab Spring). On the other hand, the paper sought to examine the causality relationship between foreign direct investments and Þnancial development. The study empirically investigates the short and long run equilibrium relationship between the variables by applied co-integration and Autoregressive Distributed Lags Approach (ARDL). The Granger causality test was employed to capture causality relationship. The obtained results show that there is a signiÞcant positive relationship between FDI and Þnancial development in short and long run, while, a signiÞcant negative relationship between Arab Spring and Þnancial development. However, the results also revealed bidirectional causality relationship between FDI and Þnancial development.