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Linkages between Investment Flows and Financial Development: Causality Evidence from Selected African Countries

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  • Asongu Simplice

    ()
    (Yaoundé/Cameroun)

Abstract

Purpose - This paper introduces previously missing financial components(efficiency, activity and size) in the assessment of the finance-investment nexus. Design/methodology/approach - VAR models in the perspectives of VECM and short-run Granger causality are employed. Usage of optimally specified econometric methods in contradiction to purely discretionary model specifications in mainstream literature. Findings - Three main findings are established: (1) while finance led investment elasticities are positive, investment elasticities of finance are negative; (2)but for Guinea Bissau, Mozambique and Togo, finance does not seem to engender portfolio investment; (3)contrary to mainstream literature, financial efficiency appears to impact investment more than financial depth. Practical implications - Four policy implications result: (1)extreme caution is needed in the use of single equation analysis for economic forecasts; (2)financial development leads more to investment flows than the other way round; (3) financial allocation efficiency is more relevant as means to attracting investment flows than financial depth; (4) the somewhat heterogeneous character of the findings also point to shortcomings in blanket policies that are not contingent on country-specific trends in the finance-investment nexus. Originality/value - (1) Contrary to the mainstream approach we use four measures of financial intermediary development(depth, efficiency, activity and size) as well as four types of investment flows(domestic, foreign, portfolio and total). (2) The chosen investment and financial indicators are derived upon preliminary correlation analysis from the broadest macroeconomic dataset available on investment and financial intermediary flows.

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File URL: http://www.afridev.org/RePEc/agd/agd-wpaper/Linkages-between-Investment-Flows-and-Financial-development.pdf
File Function: Revised version, 2013
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Bibliographic Info

Paper provided by African Governance and Development Institute. in its series Working Papers with number 12/029.

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Length: 31
Date of creation: 10 Jun 2012
Date of revision:
Publication status: Forthcoming in African Journal of Economics and Management Studies
Handle: RePEc:agd:wpaper:12/029

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Keywords: Financial development; Investment; Causality; Africa;

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References

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  1. Asongu Simplice, 2011. "Law and Finance in Africa," Working Papers 11/009, African Governance and Development Institute..
  2. Jalilian, Hossein & Kirkpatrick, Colin, 2002. "Financial Development and Poverty Reduction in Developing Countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(2), pages 97-108, April.
  3. Léonce Ndikumana, 2003. "Financial Development, Financial Structure, and Domestic Investment: International Evidence," UMASS Amherst Economics Working Papers 2003-01, University of Massachusetts Amherst, Department of Economics.
  4. Asongu Simplice, 2012. "Are financial benefits of financial globalization questionable until greater domestic financial development has taken place?," Working Papers 12/007, African Governance and Development Institute..
  5. repec:ebl:ecbull:v:3:y:2004:i:33:p:1-9 is not listed on IDEAS
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  12. Asongu Simplice, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," Working Papers 11/007, African Governance and Development Institute..
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  17. Asongu Simplice, 2011. "Finance and Democracy in Africa," Working Papers 11/020, African Governance and Development Institute..
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  29. Gries, Thomas & Kraft, Manfred & Meierrieks, Daniel, 2009. "Linkages Between Financial Deepening, Trade Openness, and Economic Development: Causality Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 37(12), pages 1849-1860, December.
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Cited by:
  1. Simplice A, Asongu, 2011. "Long-term effects of population growth on aggregate investment dynamics: selected country evidence for Africa," MPRA Paper 30128, University Library of Munich, Germany.

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