Exploring the linkages among foreign direct investment, financial development, economic complex

Abstract

Nations across the world are striving to achieve and maintain sustainable rates of growth. This study investigated the linkages between foreign direct investment, financial sector development, economic complexity and economic growth in five SADC member states namely, Angola, South Africa, Mozambique, Zimbabwe and Zambia. The study made use of the Pooled Mean Group (PMG) method to explore the long run association between the chosen variables namely, foreign direct investment, financial sector development, economic complexity and economic growth in SADC. Annual panel data spanning from 2000 to 2017 was employed. The results indicated the existence of a significant long run association between foreign direct investment inflows, financial sector development as measured by broad money growth; domestic credit to the banking sector, economic complexity as measured by economic complexity index and economic growth as measured by GDP in the long run. On the contrary, the results indicated an insignificant relationship between domestic credit to the private sector and economic growth in the short run. In addition, the results reflected the non-existence of causality between FDI and economic growth as well as between economic complexity and economic growth. With that being emphasized, the present study suggests that the selected SADC member states should enforce growth-oriented macroeconomic policies through fiscal policies, monetary policies, and policies that attract FDI that will on average lead to economic growth. It is also imperative to place more focus on reforms that widely contribute to the maintenance and development of the financial system since improved economic growth implies the need for financial services will rise thereby leading to the development of the financial sector.