FINANCIAL MARKET DEVELOPMENT AND FOREIGN DIRECT INVESTMENT IN SUB – SAHARAN AFRICA: THE ROLE OF COUNTRY LEVEL GOVERNANCE

ABSTRACT
Studies have established mixed results on the relationship between financial market development and foreign direct investment. However, governance has been identified in literature to influence both financial market development and foreign direct investment, yet no study has considered the interacting of financial market development, governance and foreign direct investment. Thus, this study is of the view that governance could probably influence the relationship between financial market development and foreign direct investment in Sub- Saharan Africa. The study purported to examine the interacting role of governance in the relationship between financial market development and foreign direct investment in Sub-Saharan Africa from 1997 to 2016. The study was backed by Eclectic theory and new institutional economic theory. The study adopted Generalized Method of Moment (GMM) technique. The study first found positive relationship between financial market development and foreign direct investment in Sub- Saharan Africa. Secondly, it found positive relationship between financial market development and foreign direct investment in Sub- Saharan Africa. Finally, it found that governance plays an interaction role in the relationship between financial market development and foreign direct investment in Sub-Saharan Africa. Hence, this study suggests that Sub-Saharan economies should enhance both their financial market and governance (specifically, control of corruption, regulatory quality, political stability and voice and accountability) in order to maximize inflows of foreign direct investment.


CHAPTER ONE
INTRODUCTION
There have been mixed results in literature on previous studies that established relationships between financial market development and foreign direct investment. Thus, this study was conducted with the intention of rectifying the mixed results in literature by introducing governance as an interacting variable because of its dual impact on foreign direct investment and financial market development.

Background to the Study
Foreign direct investment (FDI) and financial market as well as governance are vital elements in achieving sustained growth in any economy, including Sub-Saharan African economies (Adam, 2009; Coy & Cormican, 2014; Asiedu, 2006).

Foreign direct investment (FDI) is essentially an international investment where the investor gains significant influence in the management of a firm outside the investor’s home country (Solomom, 2011). FDI has become an important force in the internationalisation of investment activities in the global economies. For instance, the inflows of FDI globally were $ 1,114 billion in 2009 (United Nation Conference on Trade and Development (UNCTAD), 2011).

Foreign direct investment (FDI) remains one of the most important forms of cross-border capital flow in Sub-Saharan Africa (World Bank, 2014). It has been established that, foreign direct investment plays a significant role in the economy of Sub-Saharan Africa (Adam, 2009; Jugurnath, Chuckun & Fauzel, 2016). That is, FDI is seen as a source of economic development, modernisation, income growth and employment (Organisation for economic co-operation and development, 2002). Despite the importance of FDI in promoting economic growth and development agenda, Sub-Saharan African countries continually attract low level of FDI over the years as compared with other regions (Cantah,Wiafe & Adams,2013). This is confirmed by data from world bank, which depicts continuous fall of FDI in Sub- Saharan Africa:

This has necessitated the continuous interest of Sub-Saharan Africa researchers in FDI.

Among the determinants of foreign direct investment is financial market development (Soumaré &Tchana, 2015). Due to massive evidence in literature about the significant role of financial market development in an economy’s growth (Arestis, Demetriades & Luintel, 2001; Demirgüç-Kunt &Levine, 2004) the study intend addressing the limitations in literature examining relationship between financial market development and foreign direct investment.

Huang (2006) described financial market development (FMD) as the process of improving efficient allocation of financial resources by strengthening healthy competition, leading to increase in the overall relevance of the financial system. The Global Competitiveness Report (2016 – 2017), expatiated on FMD by stating that a well-organized financial system allocates the resources saved by citizens of a nation as well as those of foreigners to entrepreneurs with the highest expected rates of return. Investing in business is very crucial to productivity. Therefore, economies require financial markets with certain activities that can benefit the private-sector such as credit, sound banking and well regulated financial sector. In order to perform these activities, the banking sector needs to be reliable and transparent, and it has been made so clear recently that financial markets need befitting regulation to protect investors in the economy.

Financial market development (FMD) is one of the variables that has been use as an independent variable to foreign direct investment in literature, however, works on financial market development and foreign direct investment have given mixed results. For instance Otchere, Soumaré and Yourougou (2016) and Desbordes and Wei (2017) found positive association between financial market development and foreign direct investment while Wang & Liu (2017) found negative relationship between them. In addition, Soumaré and Tchana (2011) found the relationship between financial market development and FDI to be ambiguous and inconclusive because some of the indicators of financial market development used in their studies had significant relationship with FDI while others did not.

Hence, this study sought to clear this inconclusiveness by considering the absorptive capacity of financial market development on governance in its relationship with foreign direct investment. That is, the link between financial market and foreign direct investment is dependent on the nature of governance which have been classified over the years to be weak in the economies of Sub-Saharan Africa (America Security project, 2014; Kandiero and Chitiga, 2006). This is because governance structure serve as an important factor that boosts foreign direct investment (Agyemang, Fantini & Ansong, 2016; Mengistu & Adhikary, 2011 ), as well as financial market development (Law & Azman-Saini, 2012).

Therefore, even if the level of financial market development in these economies is in line with our expectation, its contribution to the level of foreign direct investment cannot be fully realized if governance structures such as control of corruption, government effectiveness, political stability and absence of violence, rule of law, regulatory quality and voice and accountability are weak in economies of Sub – Saharan Africa.

Statement of the Problem
Studies have established the relationship between FMD and FDI, nevertheless, the results have been mixed and inconclusive. While Otchere, Soumaré and Yourougou (2016) and Desbordes and Wei (2017) established that financial market development has a positive relation with FDI, Wang and Liu (2017) found negative correlation between FDI and financial market development in eastern and central region of China. Moreso, according to Soumaré and Tchana (2011), the relationship between financial market development and FDI is ambiguous and inconclusive because some of the indicators of financial market development used in their studies had significant relation with FDI while others do not.

Though inconclusive, some studies have established that FMD have significant relationship with FDI (Otchere, Soumaré & Yourougou, 2016; Desbordes & Wei, 2017). Meaning, FMD has a substantial influence on the inflow of FDI. This has necessitated Sub – Saharan Africa countries making significant effort to improve their financial market, (Gabriele, Boratav, & Parikh, 2000) in an attempt to increase inflows of FDI. In spite of this, data from World Bank on FDI indicates otherwise, the inflow of FDI is continuously falling. For instance foreign direct investment inflow as a percentage of gross domestic product was 2.70%, then it fell in 2012 to 2.40%, it fell further in 2013 to 2.36%, it increased just a little in 2014 and 2015 to 2.38% and 2.69% respectively and reduced by 2016 to 2.56% (World Development Indicator, 2018).

This trend could be attributed to the weak governance structure in the economies of Sub- Saharan Africa, which (that is, governance structure) has been argued to play an important role in improving both foreign direct investment (Mengistu & Adhikary, 2011; Agyemang, Fantini & Ansong, 2016) and financial market development (Law & Azman-Saini, 2012).

Also, these mixed or inconclusive results in literature could be explained by weak governance structure in the countries of Sub- Saharan Africa. Therefore, this study intends to address the limitations of previous studies which examined both the relationship between FMD and FDI (Mengistu & Adhikary, 2011; Agyemang, Fantini & Ansong, 2016) and FMD and governance in isolation (Law & Azman-Saini, 2012) by interacting FMD, governance and FDI in this study.

It is against this background, this study sought to examine the role of governance structure in the FMD-FDI nexus in Sub- Saharan Africa countries.

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Item Type: Ghanaian Postgraduate Material  |  Attribute: 79 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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