Abstract:
Purpose: While foreign capital plays a key role in financial development, limited research distinguishes the effects of greenfield foreign direct investment (FDI), mergers and acquisitions (M&A), foreign portfolio investment (FPI) and institutional quality on financial depth, access and efficiency. This study aims to examine how greenfield FDI, M&A, FPI and institutional quality influence different dimensions of financial development in host countries. Design/methodology/approach: This study uses panel data from 2003 to 2021 in 51 emerging and advanced economies, applying a two-step System Generalized Method of Moments and Panel Corrected Standard Errors models. Findings: The findings reveal that greenfield FDI enhances the depth and efficiency of financial institutions and the depth and access of financial markets, while reducing financial market efficiency. M&A inflows promote financial market access and efficiency but decrease financial institutions' access, whereas FPI increases financial market depth and access but diminishes efficiency and fosters financial institutions' depth. Institutional quality positively affects all dimensions of financial development across institutions and markets. Practical implications: Policymakers should move beyond aggregate measures of foreign capital and differentiate between greenfield FDI, M&A and FPI, given their distinct effects on financial depth, access and efficiency. Strengthening the institutional environment is also critical to maximize the benefits of foreign capital and fostering financial dimensions. Originality/value: This study presents a novel, disaggregated analysis of foreign capital flows, specifically greenfield FDI, M&A and FPI, alongside institutional quality, examining their effect on financial depth, access and efficiency in emerging and advanced economies.
