Cross-border bank lending versus FDI in Africa's growth story

Abstract

We investigate the relative long run growth impact of each of the two main types of Africa's private capital inflows, namely Foreign Direct Investment (FDI) and Cross-Border Bank Lending (CROSSBANK). In addition to controlling for some factors (e.g. financial reforms and trade openness), we isolate the outcomes for four groups: (1) all the African economies; (2) all the African economies except the SANE (South Africa, Algeria, Nigeria and Egypt), which are considered Africa's growth dynamos; (3) natural resource countries, which include some of the SANE and (4) countries without a sizeable hydrocarbon endowment. Our evidence suggests that both FDI and CROSSBANK exert a positive impact on African countries as a whole; an interesting comparison is that consistently, the former has a larger impact than the latter. Moreover, the effect of CROSSBANK becomes negative when the sample is restricted to oil countries. Also, financial reforms have a positive impact on economic growth in nonoil countries, while they have no growth effect on oil countries. The importance of trade openness as a driver of economic growth is confirmed for all African countries.

Keywords:

• FDI
• cross-border bank lending
• economic growth
• Africa

JEL Classification:

• F21
• O55

Acknowledgements

The authors acknowledge useful comments from participants at the African Economic Conference 2009, organized by the African Development Bank and the Economic Commission for Africa, on the theme ‘Fostering Development in an Era of Financial and Economic Crisis’, Addis Ababa, Ethiopia, 11–13 November, 2009, where a previous version of this article was presented. As usual, we retain responsibility for errors and omissions.

Notes

¹ Numerous studies have provided evidence for the close link between integrated and efficient financial markets in the process of globalizations; see, among others, Moshirian (2008).

² See, e.g. Choong et al. (2010) and Vo (2009).