Financial development and growth nexus in Asian countries: mediating role of FDI, foreign aid and trade

Purpose This paper analyzes the direct effect of financial development and the mediating impact of financial development through foreign direct investment (FDI), foreign aid and trade on economic growth for all Asian countries. Design/methodology/approach A fixed-effect model with Driscoll–Kraay panel corrected estimators was employed to find the direct and mediating impact of financial developments on growth for all 47 Asian economies from 1980 to 2020. The bootstrapped panel-quantile regression (BPQR) model is used to check how this effect varies for different income groups of countries. Findings The results demonstrated that financial development positively impacts countries' economic growth. The interaction effect of financial development with FDI, foreign aid and foreign trade negatively impacts economic growth. The BPQR results showed that FDI and foreign aid help in the growth of lower quantile economies; however, the impact is negative for middle- and upper-income countries. Trade impacts growth positively for all the quantiles of economies. Research limitations/implications The results suggest that the Asian economies must continue to provide thrust on the financial development of their own countries to achieve better growth. It also implied that the dependence on external finance is good for low-income countries and not advisable for middle- and upper-income countries. Originality/value To the best of the authors’ knowledge, the current study is the first to provide empirical evidence on analyzing both the direct and interaction effect of financial development on economic growth by considering all the Asian economies. Peer review The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-09-2022-0587