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Linkages between investment flows and financial development: causality evidence from selected African countries

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  • Simplice A, Asongu

Abstract

This paper introduces previously missing financial components(efficiency, activity and size) in the assessment of the finance-investment nexus. Using VAR models in the perspectives of VECM and short-run Granger causality, three broad 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. 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.

Suggested Citation

  • Simplice A, Asongu, 2012. "Linkages between investment flows and financial development: causality evidence from selected African countries," MPRA Paper 38719, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:38719
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    Cited by:

    1. Muyambiri, Brian & Odhiambo, Nicholas M, 2017. "The causal relationship between financial development and investment in Botswana," Working Papers 22607, University of South Africa, Department of Economics.
    2. 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.
    3. Brian Muyambiri & Nicholas Odhiambo, 2017. "Financial Development, Savings and Investment in South Africa: A Dynamic Causality Test," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 17(3), pages 1-10, September.
    4. Mehmet Balcilar & Serhan Çiftçioğlu & Hasan Güngör, 2016. "The Effects Of Financial Development On Investment In Turkey," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-21, September.

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    More about this item

    Keywords

    Financial development; Investment; Causality; Africa;
    All these keywords.

    JEL classification:

    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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