Foreign direct investment and economic growth nexus in Africa

Abstract

Purpose African countries are generally fragile. This and other related characteristics affect the potential for growth and development. The purpose of this paper is to investigate whether the effect of FDI on economic growth is contingent on a financial system that accounts for financial market fragility. An important point of departure from earlier studies is the adoption of a new measure of financial market fragility. Design/methodology/approach Given the uniqueness of the data set, the study uses a panel data and estimates an econometric model using an instrumental variable approach. For robustness purposes, a pooled ordinary least square is also estimated. Findings The study provides evidence that if the financial market is fragile as in the case of Africa, FDI inflows may have a marginally significant positive impact on economic growth. The findings suggest that fragility in the financial market is a key absorptive capacity and cannot be trivialised when exploring FDI–growth nexus in Africa. Research limitations/implications The uniqueness of the data set limited the time period of the study. Nonetheless, the findings are still crucial to policy makers in Africa and other developing countries with similar characteristics. Originality/value To the best of the authors’ knowledge, this is the first study in Africa to investigate the FDI–growth nexus which accounts for financial market fragility.