Foreign direct investment, financial development and economic growth in Africa: evidence from threshold modeling

Abstract

This paper investigates the role of local financial development in facilitating the materialisation of the growth-enhancing effect of foreign direct investment (FDI) in African countries. To this end, we improve on earlier studies by using a panel smooth transition regression model (PSTR) which is able to deal with heterogeneity issue associated with cross-country data. Based on a sample of 26 African countries over the period of 1990–2013, the results show that there is a minimum threshold level of financial development above which the growth-enhancing effect of FDI is unlocked in African countries. In other words, only countries that are located above a certain threshold level of financial development enjoy the growth-enhancing effect of FDI. These findings suggest that effort should be made by financial policymakers in African countries to improve the local financial markets conditions in order to extract the economic gains from FDI.

Keywords:

• Foreign direct investment
• growth
• absorptive capacity
• financial development
• panel smooth transition regression
• Africa

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 For more details on the limitations of the linear interaction modeling strategy, see Brambor, Clark, and Golder, (2006).

2 See Gonzalez et al. (2005) for further information about the PSTR model.

3 This paper is extracted from an ongoing research project on “FDI, growth and income inequality in Africa”. Thus, the year 2013 is chosen as the end of the study period mainly due to data constraints on income inequality indicator.

4 Author’s calculations using UNCTAD 2017, FDI (current US$) online database.

Additional information

Notes on contributors

Kouassi Yeboua

Kouassi Yeboua has a PhD in Economics obtained from Marmara University, Economics Department. His research interests are issues related to macroeconomics, income inequality, international economics (Trade and Foreign Direct Investment), industrialization policy, and applied econometrics. He is fluent in English, French and Turkish languages.