Foreign direct investment and financial development in Africa: A causality assessment in the frequency domain

Abstract

Previous contributions have recognized that Foreign Direct Investment (FDI) and financial development, respectively, play a vital role in enhancing economic growth across nations. However, the causal relationship between FDI and financial development have not been sufficiently investigated in developing countries and particularly in Africa. The current paper overcomes this gap by assessing the direct causality between FDI and financial development for 47 African countries. To that end, the frequency domain Granger causality test is used to establish short (temporary) and long run (permanent) causality. The main results document evidence of permanent and temporary causality in terms of bidirectional or unidirectional links, although there are several cases of no causality between FDI and financial development indicators. The outcomes of this study invite policymakers to address issues regarding the relationship between foreign investments and financial sector from a temporal or a permanent dynamic.