The African Business Review May-Jun 2014 | Page 36

ANALYSIS

FDI - Economic nexus: foreign
direct investment financial sector
development and economic growth

By Ibrahim Dolapo Raheem and Mutiu Abimbola Oyinlola

This study examines the relationship between foreign direct investment (FDI) and
economic growth considering the influence of financial sector development (FSD).
We empirically determine the threshold level of three FSD indicators that would
ensure the positive association between FDI and growth once these threshold levels
are exceeded. The policy implication of this study is that policies directed towards
attracting FDI should go along with and not precede policies that aim at promoting FSD.
Introduction

In recent times, developing countries,
especially in Africa, see the role of foreign
direct investment (FDI) as crucial to their
economic growth and development. FDI is
viewed as an engine of growth as it provides
the much needed capital for investment,
increases competition in the host country
industries, and aids local firms to become
more productive by adopting more efficient
technology or by investing in human and/
or physical capital.

In absolute terms, the global flow of
FDI in 2007 was estimated to be about
$1.9 trillion which was the highest the
world ever recorded. The reason for this is
not farfetched as i