Abstract:
FDI is considered as an important source of capital investment for small island economies and is
considered as a crucial tool for attaining economic growth and development. Most studies that
have been done relating to foreign direct investment (FDI) are rather on the link between FDI and
economic growth or even the link between FD and economic growth. Certainly, there is sufficient
theoretical rationale to ascertain that FDI does influence the development of financial market of
the recipient countries. Hence, basing on the argument that there is a lack of studies done in this
area mainly for the case of small island economies, this paper uses a panel vector autoregressive
model (PVAR) which caters for both endogeneity and dynamism, and investigates the relationship
between FDI and FD over the time period spanning from 1990 to 2013. Actually, the study shows
that FDI can be an important ingredient for developing the financial market in small island economies.
For instance, a bi-causal relationship between FDI and FD is observed from the results. Also,
economic growth has been identified to play a crucial role in boosting financial development in
this study. Moreover other interesting relationships have been detected in the PVAR model.
