Pages: 17-27

Abstract

The key role of financial sector in economic development and growth is undisputable. Therefore, the relationship between financial development and economic growth is of great importance. This study provides an analysis of the effects of financial development on economic growth considering additional applicable factors on economic growth including human capital, economy openness degree, foreign direct investment as well as inflation rate. In order to concurrently examine the relationship between economic growth and the stock of foreign direct investment during the period of 1981-2011, the simultaneous system of equations and the generalized method of moments have been employed and other important variables have been considered in regards to economic growth including financial development, human capital and the degree of economy openness. The results show that Iran’s economic growth is most correlated with human capital. Increasing financial development level has no impact on economic growth. The entry of foreign direct investment is shown to have negative impact on economic growth yet not facilitated the accumulation of domestic capital. A rise in the degree of openness has caused economic growth to increase and foreign investment to decrease. Also, economic growth has been identified to be a key variable in the growth of foreign investment stock.