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

  • Simplice A, Asongu

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38719.

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Date of creation: 10 May 2012
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Handle: RePEc:pra:mprapa:38719
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  1. Chien-Chiang Lee & Chun-Ping Chang, 2009. "FDI, financial development, and economic growth: International evidence," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 249-271, November.
  2. Thomas Gries & Manfred Kraft & Daniel Meierrieks, 2008. "Linkages between Financial Deepening,Trade Openness and Economic Development: Causality Evidence from Sub-Saharan Africa," Working Papers CIE 15, University of Paderborn, CIE Center for International Economics.
  3. Léonce Ndikumana, 2003. "Financial Development, Financial Structure and Domestic Investment: International Evidence," Working Papers wp16, Political Economy Research Institute, University of Massachusetts at Amherst.
  4. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, AccessEcon, vol. 3(33), pages 1-9.
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  6. Forssbaeck, Jens & Oxelheim, Lars, 2008. "Finance-specific Factors as Drivers of Cross-border Investment – An OLI Perspective," Working Paper Series 767, Research Institute of Industrial Economics.
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  8. Simplice A., Asongu, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," MPRA Paper 33868, University Library of Munich, Germany.
  9. Asongu Simplice, 2011. "Law and Finance in Africa," Working Papers 11/009, African Governance and Development Institute..
  10. Ndikumana, Leonce, 2000. "Financial Determinants of Domestic Investment in Sub-Saharan Africa: Evidence from Panel Data," World Development, Elsevier, vol. 28(2), pages 381-400, February.
  11. Francis W. Ahking, 2001. "Book Review: Measuring Business Cycles in Economic Time Series," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 36(1), pages 304-306, January.
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  13. Simplice A. Asongu, 2014. "Finance and Democracy in Africa," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 6(3), pages 92-116, October.
  14. Rousseau, Peter L., 1999. "Finance, investment, and growth in Meiji-era Japan," Japan and the World Economy, Elsevier, vol. 11(2), pages 185-198, April.
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  16. John Luiz & Harry Charalambouse, 2009. "Factors Influencing Foreign Direct Investment of South African Financial Services Firms in Sub-Saharan Africa," Working Papers 118, Economic Research Southern Africa.
  17. 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..
  18. Calderon, Cesar & Liu, Lin, 2003. "The direction of causality between financial development and economic growth," Journal of Development Economics, Elsevier, vol. 72(1), pages 321-334, October.
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  29. repec:ebl:ecbull:v:3:y:2004:i:33:p:1-9 is not listed on IDEAS
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