Balancing Blockchain and FDI: Implications for Financial Development Derived from Machine-learning Analysis

Abstract

This study empirically investigates the relationship between blockchain technology and Foreign Direct Investment (FDI) and their combined impact on financial development in 27 OECD countries from 2010 to 2022. Employing 2-step system GMM to control for endogeneity, unobserved heterogeneity, and machine learning techniques, we analyze their effects on overall Financial Development (FD), Financial Institutions Depth (FID), and Financial Markets Depth (FMD). Our findings reveal that blockchain adoption significantly enhances all three dimensions of the financial system by fostering efficiency, transparency, and security. Conversely, while FDI independently contributes to the depth of financial institutions and markets, its interaction with blockchain exhibits a significant negative moderating effect. This suggests a "crowding-out" phenomenon, where high levels of FDI may dampen the positive contributions of domestic blockchain innovation. These results underscore the necessity for nuanced policymaking that strategically promotes blockchain integration while managing the composition and impact of FDI inflows to optimize financial system development in advanced economies.