FDI and Financial Market Development in Africa

The literature on the relationship between foreign direct investment (FDI), financial market development (FMD) and economic growth focuses mainly on two aspects: the relationship between FDI and economic growth, and the role played by FMD in that linkage. The literature is almost silent on the relationship and the direction of causality between FDI and FMD. Although it has been established that FDI contributes more to growth in countries with a more developed financial market, it is not clear how FDI and FMD interact with each other. The aim of this paper is to fill this gap in the African context. Particularly, in Africa, where stock markets experience low liquidity and less transparency, FDI can be an impetus for financial market reforms and serve as a mechanism to improve the transparency and the depth of the financial markets. Also, well‐functioning financial markets can help channel foreign investments more efficiently into productive sectors, and therefore create more value for investors, hence making the countries more attractive to FDI. In short, both FDI and FMD will impact each other simultaneously, which is confirmed by our findings. We document a bidirectional causality between FDI and FMD. Furthermore, the multivariate regression results of the system of simultaneous equations also confirm the positive relationship between FDI and FMD in Africa. We also find that FDI contributes to economic growth in Africa after controlling for endogeneity between FDI, FMD and economic growth.     

Entering the last frontier: expansion by US multinationals to Africa

Literature on multinationalism, even that which focuses on economic development and incentives for foreign direct investment (FDI), largely ignores the African continent despite its market of over 700 million inhabitants and its unique challenges for foreign firms. However, the African continent provides an important arena for examining the effects of infrastructure, wealth, and political differentials across countries and the effects of these variables on the expansion decisions of US multinational corporations (MNCs). In this paper we examine the US stock market reaction to announcements of US firms entering African markets through both FDI and Non-FDI modes. Finally, we investigate the accounting performance implications of these expansions. Our results show that, on average, firms experience negative wealth effects when expanding to Africa. Further analysis shows that expansions to South Africa produce losses, while expansion to the rest of Africa produce positive gains. We also show that firms with higher return on equity perform better than firms with lower return on equity when they expand to Africa in countries other than South Africa.     

FDI and economic growth: the role of local financial markets

In this paper, we examine the various links among foreign direct investment (FDI), financial markets, and economic growth. We explore whether countries with better financial systems can exploit FDI more efficiently. Empirical analysis, using cross-country data between 1975 and 1995, shows that FDI alone plays an ambiguous role in contributing to economic growth. However, countries with well-developed financial markets gain significantly from FDI. The results are robust to different measures of financial market development, the inclusion of other determinants of economic growth, and consideration of endogeneity.     

IFRS,FDI, economic growth and human development: The experience of Anglophone and Francophone African countries

This study examines the relationships of IFRS, FDI, human development and economic growth in Anglophone and Francophone African countries between 1997 and 2017. We find that FDI, openness, schooling, and control of corruption have a positive effect of countries' decisions to adopt IFRS. The results also indicate that FDI has a positive impact on economic growth, and that this positive impact is enhanced by IFRS. Furthermore, we find that Anglophone and common law African countries adopt IFRS more than Francophone countries. Our analysis shows that FDI is positively related to decisions to adopt IFRS in both groups.     

The economic growth and foreign direct investment nexus: Does democracy matter? Evidence from African countries

This article investigates the impact of democracy on the foreign direct investment (FDI)–economic growth nexus by considering both a country's current and past political regimes. We apply a linear dynamic panel data model to data from 53 African countries over the period 1989–2014. Standard errors of the estimates are Weidmeijer corrected, following an orthogonal deviations transformation. The results show that the direct impact of FDI on growth is positive and significant. Likewise, the stock of democracy plays a positive and significant role in the growth process. However, the positive impact of FDI on growth decreases with the improvement in the historical experience of a country with democracy. These findings imply that with contemporary efforts to expand political rights in Africa, it is critical to identify alternative channels that facilitate the transmission of the flow of FDI into further and sustainable growth.     

Stock market development and economic growth: Evidence from seven sub-Sahara African countries

The paper examines the long run and causal relationship between stock market development and economic growth for seven countries in sub-Saharan Africa. Using the autoregressive distributed lag (ARDL) bounds test, the study finds that the stock market development is cointegrated with economic growth in Egypt and South Africa. Moreover, this test suggests that stock market development has a significant positive long run impact on economic growth. Granger causality test based on vector error correction model (VECM) further shows that stock market development Granger causes economic growth in Egypt and South Africa. However, Granger causality in the context of VAR shows evidence of bidirectional relationship between stock market development and economic growth for Cote D’Ivoire, Kenya, Morocco and Zimbabwe. In Nigeria, there is a weak evidence of growth-led finance using market size as indicator of stock market development. Based on these results, the paper argues that stock markets could help promote growth in Africa. However, to achieve this goal, African stock markets need to be further developed through appropriate regulatory and macroeconomic policies.     

Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions

This article examines the relationship among foreign direct investment (FDI), institutions and economic growth in sub‐Saharan Africa in different country environs. We employ a two‐step generalized methods of moments estimator with Weidmeijer corrected standard errors and orthogonal deviations to examine the empirical relations. In the full sample, we do not find evidence that FDI promotes growth. We also do not find a significant relationship between institutions and economic growth. Finally, we do not find convincing evidence that institutions alter favorably the effect of FDI on economic growth. In the subsample that excludes countries with developed financial markets, again we do not find a significant relation between FDI and economic growth. However, we find evidence suggesting that institutions play a direct role in spurring economic growth. Further, the quality of institutions seems to alter favorably the relationship between FDI and economic growth. Finally, in the sample that excludes countries with abundant natural resources, we find a direct and positive relationship between FDI and economic growth. We also find a direct relationship between institutions and economic growth. The growth‐enhancing effects of FDI, however, seem to reduce as the quality of institutions improves. The major implication from our study is that countries should take into consideration their own realities when they fashion policies to benefit from FDI in terms of achieving better growth outcomes. © 2016 Wiley Periodicals, Inc.     

The role of China's aid and ODI in the economic growth of African countries

Has external capital, such as foreign aid and foreign direct investment (FDI), been able to help the economic growth in host countries? Our paper examines the effects of China's aid and its overseas direct investment (ODI) on economic growth in 47 African countries from 2003 to 2013. We find that China's aid has significant positive effects on African economic growth. However, China's ODI plays no major role in African countries' economic growth. In addition, the relationship between aid and growth varies according to the different categories of aid, and its marginal contribution is nonlinear.     

Foreign Direct Investment and Total Factor Productivity Growth: New Macro‐Evidence

Although the role of foreign direct investment (FDI) in facilitating technology transfer is well known in the literature, empirical evidence regarding the effect of FDI on growth is mixed. The contradictory results in the literature may be due to the failure to account for endogeneity and for the abortive capacity of the hosting countries. Using panel data for 49 countries over the period 1974–2008 and the existence of Investment Promotion Agencies in the receiving countries as an instrument, our results show that increased FDI stock leads to higher productivity growth. We also find a significant positive effect on the interaction between FDI stock and distance to the technological frontier, suggesting that the ability of technologically backward countries in absorbing technologies developed at the frontiers increases as more FDI stock is accumulated.     

BOOK REVIEW

Using panel data methods to analyze data from 14 Latin American countries from 1978 to 2003, this paper empirically examines the links between foreign direct investment (FDI), local conditions, and economic growth. The results suggest that FDI plays an important role in contributing to economic growth. However, the effect of FDI on economic growth is dependent on host economy–based conditions. The empirical results from this study show that there is a positive interaction effect of FDI with technology gap and a negative interaction effect of FDI with the level of school attainment on economic growth. Furthermore, the empirical results from the FDI equation suggest that inflation, trade, school attainment, and telephone lines are the most determinant of location decisions for foreign investors. To explore the relationship between FDI and economic growth further, this paper examines Granger-causality between FDI and economic growth. Our empirical evidence shows that the direction of causality is from economic growth to FDI and not the reverse for Asian countries. Therefore, the causal link between FDI and economic growth is unidirectional. We also provide evidence that the link between FDI and economic growth is bidirectional for Latin American countries, which indicates that economic growth initially could attract more FDI, which, in turn, would then result in accelerated economic growth.     

Foreign direct investment and wages: a cross-country analysis

While globalization has led to overall economic growth in a number of countries, questions abound on its distributional effects, especially on rising wage inequality across nations. The main objective of this study is to investigate empirically the effects of foreign direct investment (FDI) on wages in a cross-country setting. We investigate the general equilibrium propositions that capital inflows (outflows) increase (lower) wages in host (home) countries due to the change in relative factor endowments. We also explore whether capital inflows have differential impacts on skilled and unskilled wages in developing economies. Time-series data on 26 countries, 15 developed and 11 developing, are used to fit the labour share equation derived from a translog GNP function with net FDI stock as one of its arguments. Results confirm that capital movement brings about a cross-country convergence of wages. However, there is some evidence that inward FDI flows increase the wage gap between skilled and unskilled workers in developing countries.     

Does foreign direct investment promote institutional development in Africa?

Foreign direct investment (FDI) inflows into Africa have increased since the turn of the millennium, mainly due to FDI growth into African countries by multinational enterprises (MNEs) from developing economies. While African governments view this growth as a positive development for the continent, many governments in the West have raised concerns regarding the institutional impact of investments from developing economies. This paper examines the impact of FDI flows on institutional quality in African countries by distinguishing investments from developed versus developing economies. Previous empirical studies have found a significant relationship between FDI flows and institutional quality in African countries but regard the relationship as MNEs rewarding African countries for adopting institutional reforms. However, little attention has been paid to the reverse causality, i.e. that FDI can cause an institutional change in African countries. Using bilateral greenfield FDI flows between 56 countries during 2003?2015, we find no significant FDI effect from developed and developing economies on institutional quality in host countries. However, aggregate FDI flows from developed and developing economies have a significant positive effect on host country institutional quality but differ concerning the impact's timing. In contrast, we find no significant effect of FDI flows from China on host country institutional quality. Our results are robust to alternative measures of institutional quality.     

Introduction to the Special Issue: Management in Africa in the Global Context 1

ABSTRACT

The primary focus of this introductory article is to provide a synoptic peek into the challenges and opportunities facing the countries of Africa in today's global economy and in their attempts to develop their national economies to achieve what is commonly termed the Millennium Development Goals. While foreign direct investment (FDI) is seen as a way to attain these goals, FDI flows to African countries remain extremely low. If Africa is to attract diversified FDI inflows, not just those focused on extractive/natural resources, African countries need to develop a system of management that is effective and efficient, internationally oriented and nationally focused, culturally inclusive and institutionally supportive and reliable, and one that promotes business growth and economic development with a sense of social responsibility.     

The simultaneous evolution of economic growth,financial development,and trade openness

This article empirically investigates the interactions among economic growth, financial development, and trade openness through simultaneous equation systems. The identification and estimation of the systems rely on the methodology of identification through heteroskedasticity. The empirical results show that each of the three variables interacts in important ways. When controlling for the reverse causation, trade promotes economic growth in high-income, low-inflation, and nonagricultural countries but has a negative impact on growth in countries with the opposite attributes. Similarly, when accounting for the feedbacks from growth, banks and stock markets have different impacts on economic growth. While banking development is detrimental to output growth, stock market development is more favorable to growth in high-income, low-inflation, and nonagricultural countries. The data also reveal coexistence of a positive effect of financial development on trade and a negative effect of trade on financial development in poorer countries. In richer countries, financial development stimulates trade openness whereas trade has an ambiguous impact on financial development.     

FDI,Productivity and Financial Development

This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well‐developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation – physical and human capital – does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well‐developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross‐country income differences.     

Does financial development reduce income inequality and poverty? Evidence from emerging countries

The objective of this paper is to examine whether bank and stock market development contributes to reducing income inequality and poverty in emerging countries. Using dynamic panel data methods with an updated dataset for the period 1987–2011, we assess the finance–inequality–poverty nexus by taking the separate and simultaneous impacts of banks and stock markets into account. Mixed explanatory findings on panel studies suggest that although financial development promotes economic growth, this does not necessarily benefit those on low-incomes in emerging countries. For the finance–poverty link, we find that neither banks nor stock markets play a significant role in poverty reduction.     

New exports matter: Discoveries,foreign direct investment and growth,an empirical assessment for Middle East and North African countries

Export diversification has become a priority goal for the development of the Middle East and North African (MENA) countries. In this article, we aim at measuring both the effects of exports' diversification on growth in MENA countries and the way new exports and foreign direct investment (FDI) interact with each others in the process of growth. Although the effects of FDI on growth have been scrutinized by numerous studies up to now, the effects of diversification and discoveries in export have only very recently been assessed. But no one has made explicit the way FDI and export discoveries interact in the growth process. A model is estimated by the system-generalized method of moments and we provide robust evidence that export discovery and FDI stimulate gross domestic product (GDP) growth in our sample of countries, and that FDI does not necessarily have the same effect on growth according to the level of discovery of the country. We also show that the joint positive effect of new exports and of imports suggest that technological spillover from import but also from the integration to global value chains are likely to occur in our sample of countries.     

Growth Effect of Foreign Direct Investment in Developing Economies: The Role of Institutional Quality

This paper investigates the effect of foreign direct investment (FDI) on economic growth conditional on the institutional quality of host countries. We first develop several theoretical arguments to show that institutional heterogeneity may be an explanation for the mixed results of previous empirical studies. Second, using a panel smooth regression model on a large sample of developing countries, we show that FDI has a positive effect on growth only beyond a certain threshold of institutional quality. To benefit from FDI‐led growth, institutional reforms should thus precede FDI attraction policies. Additionally, some reforms seem to promote faster marginal effects of FDI, while institutional complementarities may lead to an incremental effect on growth.     

Global Foreign Direct Investment: A network perspective

Foreign Direct Investment (FDI) research has usually focused on inward and outward levels of assets flows and stocks, yet very few studies have examined the Global FDI Network. We study the economic performance of countries in terms of their associations with certain FDI partners employing social network analysis. This new approach shifts the focus away from the study of certain country features and their influence on FDI stock levels. Our study of FDI stocks from 229 economies sheds light on the interactions of the global FDI network within its singular context of country-level determinants, its after-effects, internal patterns, and relationship with the network of Bilateral Investment Treaties (BITs). Our conclusion is that country features such as size, openness, skill levels, and institutional stability not only set the pace of FDI, but that they also influence both the network structure and the power positions of each node. We investigate whether that structure responds to homophilic relations between countries or to core–periphery patterns with only a few core economies and we question the strategy of signing BITs to form FDI relations. Finally, we inquire into strategic connections with powerful partners, to ascertain whether they provide beneficial settings for country growth and trade performance.     

Foreign Direct Investment Inflows,Economic Growth,and Trade Balances: The Experience of the New Members of the European Union

The study examines the role of foreign direct investment (FDI) on economic growth and trade balances of 10 emerging economies in Europe before they joined the European Union. This article uses the Granger causality test to investigate the link between FDI inflows and economic growth for the countries under study. The findings show that gross domestic product growth has a unilateral Granger-cause on FDI inflows for 9 of 10 emerging European economies. However, the results did not show FDI inflows Granger-causing the changes in economic growth of any of the 10 countries. Furthermore, FDI inflows had no or negative effects on trade balances of the majority of the emerging European nations. The policy implications of this study are that host governments in emerging economies must carefully evaluate spillover effects of FDI inflows on their economies before offering significant incentive packages to lure multinational enterprises into their countries.