Analysis of financial development and foreign direct investment inflows nexus in ECOWAS countries: Least squares dummy variable approach

Abstract

In the competitive world nowadays, financial development (FD) is recognized as one of the important drivers of economic growth via absorptive capacity. The link between FD and foreign direct investment (FDI) inflows in economic community of western african states (ECOWAS) economies is largely ignored in empirical studies. Using panel of 15 ECOWAS countries for the period 1999–2017, with bias corrected least squares dummy variable estimator this study explores the impact of FD on FDI inflows. The empirical findings from this study demonstrate that FD is significant predictor of FDI inflows. The results further suggest that human capital development and trade openness are relevant determinant of FDI influx in ECOWAS countries. The result is robust to alternative indicator of FD; broad money. Functional financial system in the host country is crucial and necessary in attracting foreign capital to the countries; hence FD architecture in the recipient economies should be strengthened.