An empirical analysis of the interrelationship between foreign capital inflows, financial development and economic growth in Africa
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Date
2021
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KNUST
Abstract
Financial markets are a key factor in producing strong economic growth because they contribute to economic efficiency by diverting financial funds from unproductive to productive uses. Countries with better-developed financial systems tend to grow faster over long periods of time, and a large body of evidence suggests that this effect is causal: financial development is not simply an outcome of economic growth; it contributes to this growth. It reduces poverty and inequality by broadening access to finance to the poor and vulnerable groups, facilitating risk management by reducing their vulnerability to shocks, and increasing investment and productivity that result in higher income generation. Despite these assertions however, there exists no study that focuses on the African economy that examines the interrelationship between foreign capital inflows, financial development and economic growth. The main objective of the study was to examine the moderating role of foreign capital inflows in the relationship between financial development and economic growth providing evidence from emerging African economies. In order to achieve this objective, the study uses an explanatory research design and a quantitative approach to the study. The study utilizes data from 2004 to 2018, combined with the selected sample of 35 countries, this amounts to a total of 525 observations. The study uses the random-effect regression model to analyse the relationship between the variables in the study. Based on the findings of the study, it can be concluded that financial development has a negative effect on economic growth among the selected countries. The study further found that foreign capital inflows in the form of foreign direct investment has a positive effect on economic growth among these African countries. Despite this however, the study found that foreign capital inflows do not moderate the relationship between financial development and economic growth among these countries. The study therefore concludes that more finance is not necessarily good for economic growth and highlight that an ‘‘optimal’’ level of financial development is more crucial in facilitating growth. Based on the findings, the study recommended among other things that countries in Africa should put in policies and measures that could help them attract more foreign direct investments into the country in order to help promote their economic growth since foreign capital inflows is found in this study to affect economic growth positively.
Description
A thesis submitted to the department of accounting and finance, school of business, Kwame Nkrumah university of science and technology in partial fulfilment of the requirements for Thea ward of the degree of master of science, finance