This paper examines the relationship between foreign direct investment (FDI), financial development, and economic growth. It argues that the development of the financial system in recipient countries is a crucial precondition for FDI to have a positive impact on economic growth. A more developed financial system enhances the efficient allocation of resources and improves the absorptive capacity of a country with respect to FDI inflows. The paper empirically investigates the role of financial system development in enhancing the positive relationship between FDI and economic growth. The results suggest that this is indeed the case. Of the 67 countries in the dataset, 37 have a sufficiently developed financial system to allow FDI to contribute positively to economic growth. Most of these countries are in Latin America and Asia, while most other countries are in Sub-Saharan Africa, where FDI does not contribute positively to growth due to weak financial systems. The paper finds that FDI has a positive effect on economic growth only if the domestic financial system has reached a certain minimum level of development. The results also show that the development of the financial system plays a key role in enhancing the positive relationship between FDI and economic growth. The paper concludes that FDI and domestic financial markets are complementary in enhancing the process of technological diffusion, thereby increasing the rate of economic growth. The empirical analysis supports the hypothesis that FDI enhances economic growth only when the domestic financial system is well-developed. The paper also highlights the importance of financial development in facilitating the absorption of technology spillovers from FDI. The results suggest that financial development is an important prerequisite for FDI to have a positive impact on economic growth. The paper provides policy-relevant conclusions, including the need for developing countries to reform their domestic financial systems before liberalizing the capital account.This paper examines the relationship between foreign direct investment (FDI), financial development, and economic growth. It argues that the development of the financial system in recipient countries is a crucial precondition for FDI to have a positive impact on economic growth. A more developed financial system enhances the efficient allocation of resources and improves the absorptive capacity of a country with respect to FDI inflows. The paper empirically investigates the role of financial system development in enhancing the positive relationship between FDI and economic growth. The results suggest that this is indeed the case. Of the 67 countries in the dataset, 37 have a sufficiently developed financial system to allow FDI to contribute positively to economic growth. Most of these countries are in Latin America and Asia, while most other countries are in Sub-Saharan Africa, where FDI does not contribute positively to growth due to weak financial systems. The paper finds that FDI has a positive effect on economic growth only if the domestic financial system has reached a certain minimum level of development. The results also show that the development of the financial system plays a key role in enhancing the positive relationship between FDI and economic growth. The paper concludes that FDI and domestic financial markets are complementary in enhancing the process of technological diffusion, thereby increasing the rate of economic growth. The empirical analysis supports the hypothesis that FDI enhances economic growth only when the domestic financial system is well-developed. The paper also highlights the importance of financial development in facilitating the absorption of technology spillovers from FDI. The results suggest that financial development is an important prerequisite for FDI to have a positive impact on economic growth. The paper provides policy-relevant conclusions, including the need for developing countries to reform their domestic financial systems before liberalizing the capital account.