HOW DOES FINANCIAL DEEPENING MODERATE FOREIGN DIRECT INVESTMENT INFLOW TO AFRICAN COUNTRIES: A NOVELTY FROM DYNAMIC THRESHOLD PANEL?

Akanbi Mudasiru Ilupeju; Dominic S.Y AMUZU; Asaanbil Ndego Ndebang AZURE

Akanbi Mudasiru Ilupeju Unilag
AMUZU University of Education, Winneba, Ghana
Asaanbil Ndego Ndebang AZURE Akim State University College, Ghana

Keywords: Threshold analysis, financial deepening, FDI, 2SLS, Africa, endogeneity

Abstract

This research paper examines the threshold value for which financial deepening moderates the inflow of foreign direct investment in the Africa context, relying on the composite financial sector indices developed by the international monetary fund. Previous studies have centred on Asia and America, while the few which looked at Africa failed to incorporate the newly developed International Monetary Fund’s financial depth index. This study is novel for further examining the nonlinearity on the sub-regions with the threshold model. We find that financial deepening precipitates foreign direct investment inflow at the threshold of 0.2307. on the other hand, panel threshold regression analysis shows that below this threshold value, financial depth is unattractive to external investors. The implication for policymakers is that to attract the inflow of foreign direct investment to Africa, there is the need to deepen their financial systems above this threshold value. Notably, the findings of this study are robust to other estimators used, tackling issues of endogeneity, heteroscedasticity and serial correlation.