Skip to main content

Advertisement

SpringerLink
Log in

Do financial development, foreign direct investment, and economic growth enhance industrial development? Fresh evidence from Sub-Sahara African countries

  • Original Article
  • Published:
Portuguese Economic Journal Aims and scope Submit manuscript

Abstract

This study investigates the impact of financial development, economic growth, and foreign direct investment on enhancing industrial growth for a panel of selected Sub-Sahara African (SSA) countries from 1990—2017. However, the present study enriches our understanding of financial development by employing a new comprehensive index focused on the accessibility, scope, and productivity of capital systems and banking institutions and incorporated foreign direct investment and economic growth as significant industrial growth drivers in the selected countries. A more robust technique Augmented Mean Group (AMG) and Common Correlated Effect Mean Group (CCEMG), were employed to access the long-run relationship among the understudy variables. Further empirical results shows that financial development and economic growth enhance industrial development with finance exhibiting signifcance while foreign direct investment is seen as adverse. Moreover, a two-way causality was obtained between industrialization and financial development while both foreign direct investment and economic growth had a one-way causality relationship with industrialization. Thus, our study implies that the government officials within these countries must provide a suitable environment for the public, private partnerships, i.e. private sector, which is the backbone for industrial development.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Adebayo TS, Kirikkaleli D (2021) Impact of renewable energy consumption, globalization, and technological innovation on environmental degradation in Japan: application of wavelet tools. Environ Dev Sustain 1–26

  • Akinsola GD, Kirikkaleli D, Bekun FV, Adebayo TS, Umarbeyli S, Osemeahon OS (2021) Economic performance of Indonesia amidst CO 2 emissions and agriculture: a time series analysis. Environ Sci Pollut Res 1–15

  • Awosusi AA, Adebayo TS, Kirikkaleli D, Akinsola GD, Mwamba MN (2021) Can CO 2 emissions and energy consumption determine the economic performance of South Korea? A time series analysis. Environ Sci Pollut Res 1–16

  • Asongu SA, Odhiambo NM (2019) How enhancing information and communication technology has affected inequality in Africa for sustainable development: An empirical investigation. Sustain Dev 27(4):647–656

    Article  Google Scholar 

  • Acheampong K (2019) The interaction effect of foreign capital inflows and financial development on economic welfare in sub-Saharan Africa. Financial Innov 5(1):1–33

    Article  Google Scholar 

  • Appiah M, Li F, Frowne DI, Donkor DT (2019) Foreign investment and growth: A case of selected African economies. Int Entrepreneur Rev 5(3):7–18

    Article  Google Scholar 

  • Baltagi BH, Feng Q, Kao C (2012) A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model. J Econom 170(1):164–177

    Article  Google Scholar 

  • Beck T, Levine R (2002) Industry growth and capital allocation: does having a market-or bank-based system matter? J Financ Econ 64(2):147–180

    Article  Google Scholar 

  • Bond S, Eberhardt M (2013) Accounting for unobserved heterogeneity in panel time series models. University of Oxford, 1–11

  • Bolak B (2011) Fostering Industrial Development in Africa in the New Global Environment: Key Policy Recommendations. Trade Negotiations Insights 10(9)

  • Botta A (2010) Economic development, structural change and natural resource booms: a structuralist perspective. Metroeconomica 61(3):510–539

    Article  Google Scholar 

  • Bourguignon F, Sundberg M (2007) Absorptive capacity and achieving the MDGs. Adv Dev 640–663. Springer

  • Brautigam D (2009) Chapter 7: Flying Geese, Crouching Tiger: China's Changing Role in African Industrialization. In D. Brautigam, The Dragon's Gift-The Real Story of China in Africa, 189–210

  • Breusch TS, Pagan AR (1980) The Lagrange multiplier test and its applications to model specification in econometrics. Rev Econ Stud 47(1):239–253

    Article  Google Scholar 

  • Cantore N, Clara M, Lavopa A, Soare C (2017) Manufacturing as an engine of growth: Which is the best fuel? Struct Chang Econ Dyn 42:56–66. https://doi.org/10.1016/j.strueco.2017.04.004

    Article  Google Scholar 

  • Chen G, Geiger M, Fu M (2015) Manufacturing FDI in Sub-Saharan Africa: Trends, Determinants, and Impact. World Bank Group Report: Retrieved from worldbank.org, 1–43

  • Crespo N, Fontoura MP (2007) Determinant factors of FDI spillovers–what do we really know? World Dev 35(3):410–425

    Article  Google Scholar 

  • Diao X, McMillan M, Rodrik D (2019) The recent growth boom in developing economies: A structural-change perspective. Palgrave Handbook Dev Econ 281–334. Springer

  • Dodzin S, Vamvakidis A (2004) Trade and industrialization in developing economies. J Dev Econ 75(1):319–328

    Article  Google Scholar 

  • Doumbe DE, Zhao Z (2017) Financial Sector Development and Industrialization in Cameroon (1970–2014). J Bus Econ 8(1):105–114

    Google Scholar 

  • Dumitrescu E-I, Hurlin C (2012) Testing for Granger non-causality in heterogeneous panels. Econ Model 29(4):1450–1460

    Article  Google Scholar 

  • Ewetan O, Ike D (2014) Does Financial Sector Development Promote Industrialization in Nigeria? Int J Res Social Sci 4(1):17–25

    Google Scholar 

  • Fanglin L, Appiah M, Dodoo RNA (2020) The Effects of Technology and Labor On Growth in Emerging Countries. Manage Res Pract 12(2):5–13

    Google Scholar 

  • Feeny S, McGillivray M (2011) Scaling-up foreign aid: Will the ‘big push’work? World Econ 34(1):54–73

    Article  Google Scholar 

  • Frankel JA (2012) The natural resource curse: A survey of diagnoses and some prescriptions. HKS Faculty Res Work Paper Ser

  • Friedman M (1937) The use of ranks to avoid the assumption of normality implicit in the analysis of variance. J Am Stat Assoc 32(200):675–701

    Article  Google Scholar 

  • Gehringer A (2013) Growth, productivity and capital accumulation: The effects of financial liberalization in the case of European integration. Int Rev Econ Financ 25:291–309

    Article  Google Scholar 

  • Gui-Diby SL, Renard MF (2015) Foreign direct investment inflows and the industrialization of African countries. World Dev 74:43–57

  • Haraguchi N, Cheng CFC, Smeets E (2017) The importance of manufacturing in economic development: Has this changed? World Dev 93:293–315

    Article  Google Scholar 

  • Haraguchi N, Martorano B, Sanfilippo M (2019) What factors drive successful industrialization? Evidence and implications for developing countries. Struct Chang Econ Dyn 49:266–276

  • Heblich S, Trew A (2019) Banking and industrialization. J Eur Econ Assoc 17(6):1753–1796

    Article  Google Scholar 

  • Kang H (2010) The Philippines' Absorptive Capacity for Foreign Aid. Retrieved from

  • Kang SJ, Lee H (2011) Foreign direct investment and de-industrialisation. World Econ 34(2):313–329

    Article  Google Scholar 

  • Kothakapa G, Bhupatiraju S, Sirohi RA (2020) Revisiting the link between financial development and industrialization: evidence from low and middle income countries. Ann Finance. https://doi.org/10.1007/s10436-020-00376-y

    Article  Google Scholar 

  • Kriaa I, Ettbib R, Akrout Z (2017) Investissements Directs Etrangers et industrialisation de l’Afrique [Foreign direct investment and industrialization of Africa]. Int J Innov Appl Stud 21(3):477–491

  • Kroszner RS, Laeven L, Klingebiel D (2007) Banking crises, financial dependence, and growth. J Financ Econ 84(1):187–228

  • Lipsey BM, Zegan M (1994) What explains developing country growth. NBER Working Paper. National Bureau for Economic Research, Cambridge, Massachusetts, 4132

  • Marconi N, de Borja Reis CF, de Araújo EC (2016) Manufacturing and economic development: The actuality of Kaldor’s first and second laws. Struct Chang Econ Dyn 37:75–89

    Article  Google Scholar 

  • McCausland WD, Theodossiou I (2012) Is manufacturing still the engine of growth? J Post Keynesian Econ 35(1):79–92

    Article  Google Scholar 

  • Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica: J Econom Soc 49:1417–1426

  • Oduola M, Bello MO, Popoola R (2021) Foreign Direct Investment, Institution and Industrialisation in Sub-Saharan Africa. Econ Change Restruct 1–30

  • Olajide OJ, Akinola BO, Ajao SM, Enaibe BU (2016) Sodium azide-induced degenerative changes in the dorsolateral prefrontal cortex of rats: attenuating mechanisms of kolaviron. Eur J Anat 20(1):47–64

  • Opoku EEO, Yan IKM (2019) Industrialization as driver of sustainable economic growth in Africa. J Int Trade Econ Dev 28(1):30–56

  • Paul J, Sebastian V, Ramanathan A (2000) Trade and Industrialisation in India: An Empirical Study. Foreign Trade Rev 35(2–3):15–21

    Article  Google Scholar 

  • Pesaran H (2004) General diagnostic tests for cross-sectional dependence in panels. University of Cambridge, Cambridge Work Papers Econom 435

  • Pesaran HM (2007) A simple panel unit root test in the presence of cross-section dependence. J Appl Economet 22:265–312

    Article  Google Scholar 

  • Pesaran MH (2006) Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74(4):967–1012

  • Pesaran MH (2015) Testing weak cross-sectional dependence in large panels. Economet Rev 34(6–10):1089–1117

    Article  Google Scholar 

  • Pesaran MH, Smith R (1995) Estimating long-run relationships from dynamic heterogeneous panels. J Econom 79–113

  • Pesaran MH, Ullah A, Yamagata T (2008) A bias-adjusted LM test of error cross-section independence. Econom J 11(1):105–127

    Article  Google Scholar 

  • Pesaran MH, Yamagata T (2008) Testing slope homogeneity in large panels. J Econom 142(1):50–93

    Article  Google Scholar 

  • Phillips PC, Sul D (2003) Dynamic panel estimation and homogeneity testing under cross-section dependence. J Econom 6(1):217–259

  • Rioja F, Valev N (2004) Finance and the sources of growth at various stages of economicdevelopment. Econ Inq 42(1):127–140

  • Rodrik D (2007) Industrial development: Some stylized facts and policy directions. Sustain Dev Perspect 7–28

  • Rodrik D (2012) Unconditional Convergence in Manufacturing *. Q J Econ 128(1):165–204. https://doi.org/10.1093/qje/qjs047%JTheQuarterlyJournalofEconomics

    Article  Google Scholar 

  • Rodrik D (2016) Premature deindustrialization. J Econ Growth 21(1):1–33. https://doi.org/10.1007/s10887-015-9122-3

    Article  Google Scholar 

  • Shafaeddin SM (2005) Towards an alternative perspective on trade and industrial policies. Dev Change 36(6):1143–1162

  • Shahbaz M, Bhattacharya M, Kumar M (2017) Financial Development, Industrialisation, Urbanisation and the Role of Institutions: A Comparative Analysis between India and China. MPRA Paper No. 81609, 1–37. Online athttps://mpra.ub.uni-muenchen.de/81609/

  • Shi T, Hu Y, Liu M, Li C, Zhang C, Liu C (2020) How Do Economic Growth, Urbanization, and Industrialization Affect Fine Particulate Matter Concentrations? An Assessment in Liaoning Province, China. Int J Environ Res Public Health 17(15):2–15

    Article  Google Scholar 

  • Signé L (2018) African development, African transformation: how institutions shape development strategy. Cambridge University Press 1–10

  • Smeets R (2008) Collecting the pieces of the FDI knowledge spillovers puzzle. World Bank Res Observ 23(2):107–138

    Article  Google Scholar 

  • Swamy PA (1970) Efficient inference in a random coefficient regression model. Econometrica: J Econom Soc 38:311–323

  • Szirmai A (2012) Industrialisation as an engine of growth in developing countries, 1950–2005. Struct Chang Econ Dyn 23(4):406–420

    Article  Google Scholar 

  • Szirmai A, Verspagen B (2015) Manufacturing and economic growth in developing countries, 1950–2005. Struct Chang Econ Dyn 34:46–59. https://doi.org/10.1016/j.strueco.2015.06.002

    Article  Google Scholar 

  • UNCTAD 2019 World Investment Report: Special economic zones United Nations, p. 126–206. Posted: 2019

  • UNECA (2013) Harmonizing Policies to Transform the Trading Environment United Nations Commission for Africa. 1–73. Retrieved from:www.uneca.org/sites/default/files/PublicationFiles/aria_vi_english_full.pdf

  • Wells H, Thirlwall AP (2003) Testing Kaldor’s growth laws across the countries of Africa. Afr Dev Rev 15(2–3):89–105

    Article  Google Scholar 

  • Westerlund J, Edgerton DL (2007) A panel bootstrap cointegration test. Econ Lett 97(3):185–190

    Article  Google Scholar 

  • Yu QH, Qi ZY, Yu YT (2018) Industrialization and Economic Growth in China: A Panel Test of Kaldor’s Growth Laws. Paper presented at the 2018 International Conference on Management Science and Engineering (ICMSE)

  • Дaниил ДT, Кoзлoв AB (2021) ИCCЛEДOBAHИE BЛИЯHИЯ ИHOCTPAHHЫX ИHBECTИЦИЙ HA ЭКOHOMИЧECКИЙ POCT B ГAHE The effect of foreign investments on economic growth in ghana: an empirical study. Moscow Econ J 1–21

Download references

Author information

Authors and Affiliations

  1. School of Finance & Economics, Jiangsu University, Jiangsu, China

    Michael Appiah

  2. Dorstell Research & Consultancy, Koforidua, Ghana

    Michael Appiah

  3. Economic and Finance Application and Research Center, İstanbul Ticaret University, Istanbul, Turkey

    Bright Akwasi Gyamfi

  4. Department of Business Administration, Faculty of Economics and Administrative Science, Cyprus International University, North Cyprus, Nicosia 99040, Turkey

    Tomiwa Sunday Adebayo

  5. Faculty of Economics Administrative and Social Sciences, Istanbul Gelisim University, Istanbul, Turkey

    Festus Victor Bekun

  6. Department of Economic Security, South Ural State University 76, Lenin Aven, Chelyabinsk, 454080, Russia

    Festus Victor Bekun

  7. Faculty of Economics and Commerce, The Superior University, Lahore, Pakistan

    Festus Victor Bekun

Authors
  1. Michael Appiah
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bright Akwasi Gyamfi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Tomiwa Sunday Adebayo
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Festus Victor Bekun
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Bright Akwasi Gyamfi.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary file1 (DOCX 15 KB)

Appendix

Appendix

1.1 List of investigated countries

Botswana, Gabon, Namibia, Mauritius, South Africa, Zambia, Sudan, Nigeria, Kenya, Ghana, Cote d'Ivoire, Cameroon, Angola, Togo, Uganda, Zimbabwe, Burkina Faso, Mozambique, Senegal.

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Appiah, M., Gyamfi, B.A., Adebayo, T.S. et al. Do financial development, foreign direct investment, and economic growth enhance industrial development? Fresh evidence from Sub-Sahara African countries. Port Econ J 22, 203–227 (2023). https://doi.org/10.1007/s10258-022-00207-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10258-022-00207-0

Keywords

Search

Navigation