Do Financial Sector Characteristics Influence FDI? A Study of Western Balkans Countries

This paper investigates the relationship between the development of the financial sector and foreign direct investment (FDI) inflows in Western Balkans countries from 2007 to 2023. The study focuses on four indicators of the financial sector: the ratio of bank nonperforming loans to total gross loans, domestic credit to the private sector by banks, the number of commercial bank branches per 100,000 adults, and the number of borrowers from commercial banks. Using panel data regression techniques, including fixed and random effects models, the analysis aims to understand how these financial characteristics affect net FDI inflows as a percentage of GDP. The findings show that higher domestic credit to the private sector has a statistically significant and positive impact on FDI inflows, suggesting that a stronger credit environment encourages foreign investors. In contrast, a higher number of borrowers from commercial banks is associated with a significant decrease in FDI, which may reflect credit risk. Other variables, such as nonperforming loans and commercial bank branches, did not show a consistent effect. These results highlight the importance of credit availability and financial soundness for attracting FDI in the Western Balkans region. The study contributes to the understanding of how financial sector indicators influence foreign investment decisions in small, developing European economies.