Volume : 1, Issue : 7, December - 2012

The Role of Financial Markets in Economic Growth

Dr. Ercan Ekmek Io Lu, Ismail Celik

Abstract :

This paper aims at scrutinizing how financial markets operate in trying to influence the magnitude and direction of economic growth as they purpose to intermediate funds between surplus spenders and deficit spenders. We examine how direct foreign investments and local investors interlink to optimize on the growth of the economy. We model our problem to incorporate financial markets operations, capital flows from foreign nations and the local market capital structure to show their influence in the level of economic growth. Our focus is construed towards two view points; that form of growth emanating from foreign direct investment and that which comes from local investments. The various links that are enjoined to from the funders all the way to the injections in the economic structure are also examined. Various past works by renowned scholars serve to provide the empirical evidence that foreign direct investment have superior impact on the growth relative to local investments. From this, we will demonstrate that for any financial market to operate at the point of optimality it needs to adopt mechanisms, policies and infrastructures to attract the FDI. Economic planners are faced with difficulties of balancing between short term funds availability versus long term. Their levels within the economy serve to guide liquidity conditions as well as prepare economies for long term investment take off influencing policing. The paper formulates ways through which agents can advantage themselves from the policies to either increase their return on investment or to grow, expand their enterprises.