Bank-based financial development and foreign direct investment in sub-Saharan African countries: a dynamic causal linkage

Abstract

In this paper, the causal relationship between financial development and foreign direct investment in sub-Saharan African (SSA) countries is examined. Three proxies of financial development, namely bank deposits, deposit money bank assets, and liquid liabilities have been used to examine this linkage. Using a multivariate panel Granger-causality model, the study found that the causal relationship between financial development and foreign direct investment is dependent on the variable used to measure the level of financial development. The relationship also varies over time. Overall, the study found a causal flow from FDI to financial development to predominate, at least in the short run. The study, therefore, recommends that policies aimed at attracting foreign direct investment inflows should be prioritised in SSA countries in the short run, in order to foster the development of the financial sector in the region.