Blockchain Technology and Financial Development

Prior studies have extensively examined the role of financial technologies, particularly blockchain and related digital innovations, in shaping financial development. Blockchain technology is increasingly recognized as a transformative force in modern financial systems due to its ability to enhance transparency, security, and operational efficiency. For instance, Chi et al., (2025) demonstrate that blockchain significantly promotes the digital economy, while Zhou et al., (2020) find a positive effect of blockchain on digital asset transactions. Similarly, Yiran Wang, (2020) highlights that blockchain facilitates financial services development across multiple domains, including equity crowdfunding, cross-border remittance, and supply chain finance, thereby strengthening the overall financial development and it improved financial inclusion and stability in emerging markets (Harakeh et al., 2024) while others note its role in streamlining banking and insurance processes in developed economies (Cotugno et al., 2024). Using a generalized linear model, Siddik et al., (2021) show that blockchain enhances international trade which indirectly supports financial development. In capital markets (FMD), applications in trade finance, securities settlement, and asset tokenization are poised to increase market liquidity and transparency(Cui et al., 2024).Furthermore, Allen et al., (2022) and Ozili, (2023) reveal that innovations such as central bank digital currencies (CBDCs), cryptocurrencies, and FinTech significantly improve financial inclusion and stability. Chang et al., (2020) and Khatwani et al., (2023) confirm that blockchain technology drives financial sector innovation, particularly within banking, financial services, and insurance industries. Moreover, Vincent & Evans, (2019) provide cross-country evidence that cryptocurrency adoption enhances financial inclusion and financial sector development.

Foreign Direct investment and Financial Development

A substantial body of literature has explored the contribution of foreign direct investment to financial development like according to the, Majeed et al., (2021), Foreign direct investment has a statistically significant relationship with financial development. Empirical evidence indicates that foreign capital inflows, including foreign portfolio investment (FPI) and FDI play a crucial role in deepening financial markets. For instance, Oyerinde, (2019) reports that foreign portfolio investment has a significant long-run positive impact on stock market development in Nigeria. Similarly, Khattak & Khan, (2023) find that foreign direct investment significantly enhances financial development in Belt and Road Initiative (BRI) countries. The relationship between FDI and financial development is well-trodden ground in economics. The conventional view, rooted in the financial development theory pioneered by authors like Levine, (2005) ,posits that FDI fosters financial deepening by introducing competition, transferring advanced risk management practices, and stimulating the demand for more sophisticated financial services (Alfaro et al., 2004). This typically leads to a positive impact on both FID and FMD. However, this view is not monolithic. Critics point to potential downsides, including the "crowding out" of domestic firms and the possibility that foreign subsidiaries may rely on internal capital markets or their parent companies' financial networks, thereby limiting their positive spillovers to the host country's domestic financial system.

Finally, although existing studies provide substantial evidence on the individual effects of blockchain technology and foreign direct investment on financial development, limited research has examined their interactive relationship, particularly in the context of OECD countries. Most prior studies focus on either financial technology or foreign investment in isolation, neglecting the potential moderating role of FDI in shaping the effectiveness of blockchain technology adoption. Therefore, this study contributes to the literature in three key ways. First, it empirically investigates the impact of blockchain technology on financial development, financial institution depth, financial market depth across OECD countries. Second, it examines the role of foreign direct investment as a driver of financial development, financial institution depth, financial market depth Third, and most importantly, it explores the moderating effect of FDI on the relationship between blockchain technology and financial development, financial institution depth, financial market depth thereby providing new insights into the potential crowding-out dynamics within advanced financial systems. Our study advances the existing literature by demonstrating using both econometric and machine learning approaches the direct effect of blockchain on financial development and depth. Specifically, it underscores blockchain’s capacity to improve transparency, enhance operational efficiency, and expand access within financial systems

The theoretical underpinning for the interaction between blockchain and FDI can be drawn from Institutional Theory and the Resource-Based View (RBV). From an RBV perspective, blockchain represents a valuable, rare, and imperfectly imitable resource that can provide a competitive advantage to a country's financial system. FDI, bringing its own bundle of resources (capital, technology, expertise), could theoretically be complementary, accelerating the adoption and scaling of blockchain and the first hypothesis is;

The positive impact of blockchain technology on financial development:

Blockchain technology enables financial institutions to perform core functions like payments, clearing, settlement, securitization, and lending without relying on intermediaries, thereby reducing administrative costs, enhancing efficiency, and limiting opportunities for data manipulation (Oh & Shong, 2017) .Operating through a decentralized and synchronized ledger system, it ensures transparency, immutability, and secure verification of transactions, which reduces risks such as fraud and double-spending while minimizing the need for costly audits and external oversight (Khatwani et al., 2023) Furthermore, by enhancing traceability and data integrity, blockchain strengthens governance, auditability, and ownership verification in global trade and capital markets, contributing to more reliable and efficient financial operations (Khatwani et al., 2023) . Its applications also improve financial access and monitoring such as in lending and peer-to-peer platforms thereby supporting better risk management and accountability. However, the extent to which blockchain improves outcomes like financial reporting quality or reduces accounting manipulation remains contingent on firm-level implementation strategies and institutional contexts (Autore et al., 2024). In light of the above analysis, this study proposes the first hypothesis:

H1: Blockchain technology has a significant positive impact on FD, FID and FMD.

The positive impact of foreign direct investment on financial development:

FDI contributes to financial development by increasing the availability of capital in the domestic economy and strengthening financial intermediation through banking and money markets, thereby facilitating firms’ access to external finance (Desai et al., 2006).The presence of foreign ownership further enhances banking sector performance, as it reduces interest rate margins and borrowing costs while improving loan portfolio management and risk assessment, leading to more efficient capital allocation for firms (Eller et al., 2005). Unlike domestic institutions engaged in relationship-based lending, foreign-owned banks typically adhere to international standards, thereby improving allocative efficiency, strengthening institutional development, and enhancing long-term financial stability; although their behavior may occasionally amplify credit cyclicality, their superior risk management and operational efficiency can ultimately reduce financial vulnerabilities and support sustainable economic development (Eller et al., 2005).Furthermore, international capital flows, including both foreign direct and portfolio investments, enhance stock market performance and expand the pool of investable funds, enabling countries to supplement domestic savings and support higher levels of investment and economic integration into global markets (Oyerinde, 2019; Yavas & Malladi, 2020). thereby, the second hypothesis is articulated as follows:

H2: Foreign direct investment has significant positive impact on FD, FID and FMD.

The moderating effect of foreign direct investment on the relationship between blockchain technology and financial development:

Institutional Theory suggests that the interaction between foreign direct investment and domestic innovation may generate conflict-driven dynamics, as resource-rich foreign firms can influence regulatory frameworks in ways that favor incumbents over local enterprises, thereby constraining domestic technological development (Autore et al., 2024). So ,the entry of foreign firms may induce a crowding-out effect, whereby domestic firms particularly those with limited resources are displaced from the market due to intensified competition and superior capabilities of foreign firms, ultimately reducing domestic investment and productive capacity (Farla et al., 2016; Choi, 2018) . For instance, foreign financial institutions with greater access to capital and skilled labor may dominate blockchain adoption and innovation, thereby limiting the growth and scalability of domestic blockchain initiatives and weakening their contribution to financial development. Alfaro et al., (2004) emphasize, the ability of domestic firms to benefit from foreign presence depends on their access to financial resources; in the absence of well-developed financial markets, limited absorptive capacity restricts their ability to adopt new technologies and internalize spillovers, thereby reinforcing the crowding-out effect and weakening the positive impact of foreign investment on domestic innovation and financial development. In light of the foregoing arguments, the following hypothesis is advanced:

H3: FDI negatively moderates the relationship between blockchain technology and FD, FID and FMD, indicating a crowding-out effect.

Figure 1

To examine the impact of Blockchain on financial development and depth in OECD countries, we collected data from various sources for the period 2010 to 2022. The selection of OECD countries is justified not merely by data availability, but because they represent a homogenous group of advanced economies with established financial systems, allowing for a clearer examination of the marginal effects of technological innovation and capital inflows. Using a consistent group also helps control for vast differences in institutional quality that are present in global samples.

The dependent variables FD, FID, and FMD are comprehensive indices sourced from the IMF. These are preferred over single metrics (e.g., private credit) as they capture multidimensional aspects of development, including depth, access, and efficiency. The core independent variable, Blockchain (BC) measured and compiled a Blockchain using data from Crunchbase, including startups related to Bitcoin, Blockchain, cryptocurrency, decentralized finance, Ethereum, non-fungible tokens, smart contracts, and Web3. Crunchbase is a comprehensive database providing detailed information on businesses, startups, funding rounds, investors, and industry trends. Additionally, we developed a composite index for DFI using principal component analysis (PCA), incorporating ATMs, BR, and DP. All other variables, along with their sources and descriptions, are detailed in Table 1, and trends are shown in Figure 1.

Table 1: Variable’s descriptions.

Table 1

To test our hypotheses, we specify two dynamic panel models. The use of a dynamic model (including the lagged dependent variable) is standard in financial development literature, as financial systems are inherently persistent.

Model 1: direct impact of Blockchain on financial development and depth, we specify the following equation:

Yit = α + β1 BCit + β2 BNPLit + β3 DFIit + β4 GDPit + β5 NIit + β6 ACCOUNTit + β7 GOVit + β8 RDit + εit

where: Yit represents the dependent variables (FD, FID, FMD) for country i at time t. BCit is the Blockchain variable. Other variables include BNPL, DFI, GDP, NI, ACCOUNT, GOV, and RD. εit is the error term.

Model 2: indirect impact of Blockchain through the moderating role of FDI, we extend the model by including interaction terms:

Yit = α + β1 BCit + β2 FDIit + β3 (BCit×FDIit) + β4 BNPLit + β5 DFIit + β6 GDPit + β7 NIit + β8 ACCOUNTit + β9 GOVit + β10 RDit + εit

where: BCit × FDIit is the interaction term capturing the moderating effect of FDI on Blockchain's impact. Both models use the GMM approach to address potential endogeneity, ensuring robust and reliable estimates by using lagged values of the explanatory variables as instruments.

We employ the two-step system GMM estimator developed by Blundell & Bond, (1998) . This method is particularly justified here for several reasons: Endogeneity: Blockchain development and financial depth are likely jointly determined. The GMM uses internal instruments (lagged levels and differences) to address this. We ensure the robustness of our GMM models by adhering to standard diagnostics: the Arellano-Bond test for AR (1) and AR (2) processes in errors (where rejecting AR (1) but not AR (2) is desired) and the Sargan test for over-identifying restrictions (a non-significant p-value is preferred). We also address collinearity by calculating Variance Inflation Factors (VIFs) for all models, confirming that multicollinearity is not a concern (all VIFs < 5).

Figure 1: Trends of Blockchain startups, FD, FID, FMD, and FDI in OECD.

Table 2

Table 2 summarizes descriptive statistics for study variables across 351 observations. The FD has a mean of 0.687. Both FID and FMD indices have similar means around 0.639 and 0.635. BC average 2.209. FDI has a mean of 0.973 with a wide range. The DFI shows high variability. GDP and NI indicate moderate growth. Governance metrics and RD expenditure show less variability.

Our findings show a strong positive impact of Blockchain on FD, FID, and FMD in OECD countries. Blockchain coefficients are 0.038, 0.032, and 0.068, all significant at the 1% level, indicating significant enhancements in financial system depth and efficiency and confirms the hypothesis H1 (Table 3). Blockchain improves financial transactions and services by increasing access, transparency, and efficiency, fostering a robust financial environment (Cahill et al., 2020 ; Kaniadakis & Foster, 2024). Specifically, it enhances financial institutions through efficient credit provision, asset management, and trust, and boosts financial markets by increasing market capitalization, trading activity, and debt security management.

Furthermore, the interaction term BC*FDI is negative and significant for FD, FID, and FMD, with coefficients of -0.018, -0.019, and -0.026, respectively, suggesting that higher FDI levels weaken Blockchain's positive impact due to a crowding-out effect which supports the hypothesis H3. However, FDI positively affects FID and FMD, with coefficients of 0.044 and 0.058, significant at 5% and 1% levels, respectively, enhancing financial institutions and markets by introducing capital, expertise, and technology and validates the hypothesis H2. Its impact on overall FD is not significant. Additionally, DFI consistently positively influences all indices, underscoring the importance of integrating digital technologies into financial systems.

Table 3

We conduct various artificial neural networks and machine learning methods to test the validity of blockchain and FDI-led financial development, including institutional and market development, as suggested by Zhang et al., (2024) .Table 5 describes all the machine learning methods used in the study, describing their respective benefits and limitations.

Table 4

Figures 2 (a-e) to 4 (a-e) present the results of different machine learning algorithms in predicting FD, FID, and FMD using blockchain and FDI for a sample of OECD economies. All machine learning techniques used in the study show positive trends. These figures illustrate the expected role of blockchain adoption and FDI on FD, FID, and FMD along with digital financial inclusion, bank non-performing loans, accountability, government effectiveness, GDP, national income, and research and development. This comprehensive analysis highlights the significant potential of blockchain and FDI in advancing various dimensions of financial and institutional development in OECD countries, paving the way for more sustainable and inclusive economic growth.

Figure 2

Table 5

Figure 3

This study provides important insights into the relationship between blockchain technology, FDI, and financial development in OECD countries. The results show that blockchain has a strong and positive effect on financial development, financial institutions depth, and financial markets depth. This finding aligns with theoretical expectations and prior literature emphasizing blockchain’s ability to reduce transaction costs, enhance transparency, and improve security in financial systems (Khatwani et al., 2023; Underwood, 2016). By enabling decentralized financial processes, blockchain strengthens intermediation and supports innovation in banking and capital markets (Cotugno et al., 2024; Allen et al., 2022). Applications such as digital payments, trade finance, and asset tokenization further enhance liquidity and reduce operational risks (Cui et al., 2024; Siddik et al., 2021) , reinforcing its role in financial system transformation (Harakeh et al., 2024) .The strong positive direct effect of blockchain (H1) is also consistent with evidence that its core attributes disintermediation, enhanced security, and transparency deepen financial institutions and markets in advanced economies (Cahill et al., 2020) . In contrast, the impact of FDI is mixed. While FDI significantly enhances financial institutions and markets depth, its effect on overall financial development is not robust. This provides partial support for H2 and reaffirms the traditional role of FDI as a source of capital, technology, and expertise that strengthens specific segments of the financial system (Majeed et al., 2021; Alfaro et al., (2004) . However, its benefits may remain concentrated in particular sectors rather than the entire financial system (Yavas & Malladi, 2020).

Figure 4

The core contribution of this study lies in the strong support for H3. The negative and significant interaction term indicates that FDI weakens the positive impact of blockchain, suggesting that their relationship is not complementary but characterized by tension. This crowding-out effect can be explained through both Resource-Based View and Institutional Theory. Large foreign multinational firms may absorb scarce domestic resources such as skilled labor and capital, thereby limiting opportunities for local blockchain innovation (Farla et al., 2016; Choi, 2018) . At the same time, they may influence regulatory frameworks in ways that favor established players, constraining the growth of emerging technologies (Autore et al., 2024) . Additionally, reliance on internal financing by multinational firms reduces engagement with domestic financial systems, limiting spillover effects and weakening the integration of blockchain innovations (Desai et al., 2006) . These findings challenge the conventional assumption that foreign investment is always beneficial for technological advancement. The machine learning results further reinforce these findings by providing consistent predictive evidence across multiple models. Techniques such as support vector machines, random forests, and gradient boosting capture complex and nonlinear relationships, confirming the robustness of the econometric results. The consistency across methods highlights blockchain as a key driver of financial development, while also revealing the conditional and context-dependent role of FDI (Zhang et al., 2024) . Finally, the negative coefficient of GDP growth observed in some models, although counterintuitive, may reflect the structural characteristics of OECD economies. During periods of high economic growth, investment may shift toward traditional sectors, while financial innovation particularly blockchain adoption follows a longer-term trajectory not directly linked to short-term business cycles (Levine, 2005; Svirydzenka, 2016).