Financial development threshold, private capital inflows and economic growth

Abstract

PurposeThis study aims to examine the relationship between private capital inflows, financial development and economic growth in 28 sub-Saharan African (SSA) countries between the periods 1995 and 2017.Design/methodology/approachThe study used a secondary source of data obtained from the world development indicator (WDI) and used the system generalized method of moments (SGMM) and dynamic panel threshold regression to analyze the data.FindingsThe study found that foreign direct investment has a negative and significant impact on the economic growth of SSA. The study also found that portfolio investment has a positive impact on economic growth but it is statistically insignificant. However, when portfolio investment interacted with financial development, it became positive and statistically significant presupposing that financial development is a necessary condition for portfolio investment to exert impact on economic growth. Further, the study showed that the interaction of foreign direct investment with financial development has a negative and significant effect on economic growth. Finally, the study found the minimum threshold of financial development at 42.66 per cent.Practical implicationsPolicymakers in SSA should be cautious and critical in the kind of foreign direct investment they attract as the open door policy to attract all kinds of foreign direct investment would not bring about the desired result. Also, policymakers in the region should develop and implement policies that would deepen and strengthen the financial system to foster the development of the country’s financial sector and accelerate economic growth.Originality/valueThe contribution of the study lies in establishing a minimum threshold of financial development; thus, providing a clear-cut direction for policymakers in SSA countries in their pursuit of financial development and economic growth.