Journal of Applied Finance & Banking

Linkages between Foreign Direct Investment and Financial Development: Evidence from West African Countries

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  • Abstract


    This study investigates the relationship between foreign direct investment (FDI) and financial development for ten member countries of the Economic Community of West African States (ECOWAS) during the period from 1970 to 2017. Domestic credit to private sector and money supply as share of GDP are used as measures for financial development. As estimation method, the study employs the Common Correlated Effect Mean Group (CCEMG) estimator that deals with both slope heterogeneity and cross-sectional dependency across countries. The empirical findings indicate bidirectional causality between money supply and foreign direct investment in the short run, while there is no evidence of causality between domestic credit to private sector and foreign direct investment. Furthermore, there is bidirectional causality between financial development and economic growth in the short run. In the long run, economic growth was found to cause both foreign direct investment and money supply.

    JEL classification numbers: C33, E51, F21, O55.

    Keywords: Foreign direct investment, financial development, causality, ECOWAS.