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The Long‐run and Short‐run Effects of Foreign Direct Investment on Financial Development in African Countries

Njangang Henri,Nembot Ndeffo Luc,Nawo Larissa

Published 2019 in African Development Review

ABSTRACT

This paper contributes to the understanding of the other neglected effects of foreign direct investment by analysing how foreign direct investment affects financial development in the short-run and long-run for a panel of 49 African countries over the period 1990-2016. The empirical evidence is based on Pooled Mean Group (PMG) approach. With three panels differentiated by income level, the following findings are established: first, while there is a positive and significant long-run relationship between foreign direct investment and financial development in Africa, in the short-run the effect of foreign direct investment on financial development is negative. Second, the effect of foreign direct investment is positive and significant in the long-run in the three sub-samples. However, in the short-run, the effect of foreign direct investment is negative and significant in lower-income countries and non-significant in lower-middle-income and upper-middle-income countries. Overall we find a strong evidence supporting the view that foreign direct investment promotes financial development in African countries in the long-run.

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