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The long-run and short-run effects of foreign direct investment on financial development in African countries

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  • Njangang, Henri
  • Luc, Nembot Ndeffo
  • Nawo, Larissa

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.

Suggested Citation

  • Njangang, Henri & Luc, Nembot Ndeffo & Nawo, Larissa, 2019. "The long-run and short-run effects of foreign direct investment on financial development in African countries," MPRA Paper 94362, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94362
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    More about this item

    Keywords

    Foreign direct investment; financial development; Pooled Mean Group; Africa;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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