Financial Development, Foreign Direct Investment and Economic Growth: Challenges for Developing Countries

Although the pattern of growth in developing countries is characterised by instability, uncertainties and volatility, the experience of the five fast-growing developing economies of Brazil, Russia, India, Mexico and China (BRIMCs) presents an unprecedented challenge for other developing countries. Therefore, this thesis argues that the emergence of the BRIMCs as the future growth engine of the world presents an excellent backdrop to re-examine the importance of financial development and foreign direct investment (FDI) in the Sub-Saharan African (SSA) context. It is important to mention that for empirical studies, the methodologies used for estimations will differ for different groups of countries. Hence, the study applies panel data techniques to take into account the heterogeneity of these developing countries. It further uses dynamic panel data framework and a panel co-integration analysis to capture the long-run relationships. The measures employed assessed various aspects of financial development including; private credit as a ratio of GDP, bank credit, liquid liabilities, stock market capitalisation and value of stock traded, and a single measure of FDI being the annual inflow of FDI as a ratio of GDP for 60 developing countries during 1980-2007. The study also explores the interaction between economic openness and human capital insofar as the attraction of FDI is concerned in the developing countries under consideration. The findings reveal that financial liberalisation and good institutions are important for financial development. For the SSA countries, the results indicate that while financial liberalisation promotes stock market development, the lack of good institutions, in particular control of corruption, bureaucratic quality and rule of law are less favourable to financial development. Furthermore, the study finds that economic openness and human capital also play an important role in the attraction of FDI and the growth effect of FDI in developing countries. The primary policy implication is that SSA countries should make efforts towards initiating and implementing financial sector development reforms and FDI incentives.