The African Business Review May-Jun 2014 | Page 37

record positive effect of FDI on growth and countries in most
SSA do not? Could the answer to these questions be linked to a
well-developed financial market? These questions become crucial
following the findings of previous studies like that of Levine
(2000) and Alfaro et al. (2003).

It is the objective of this study to determine the level of
FSD that will ensure positive effect(s) of FDI on growth once
this threshold level is reached. Hence, we adopted Threshold
Auto Regressive (TAR) developed by Hansen (2000). The scope
of this study which is dictated by availability of data is based on
time series data for fifteen countries in SSA and the time frame
of 1970-2010. To the best of our knowledge, this will be the first
attempt to capture this relationship in SSA countries. Studies like
that of Azman-Saini et al. (2010), Liao and Huang (2009) and
Girma (2003) all extracted data from both set of countries thus
violating what can be called “empirical principle”. Besides, since
a country-by-country time- series approach is adopted, policy
prescriptions are more likely to be based on evidences peculiar
to each country.

It is against this background that this study wants to address
the following questions: what is the impact of FDI on growth?
Is FSD relevant for the flow of FDI into an economy? What
factors are responsible for attracting FDI inflow? Are these factors
specific to certain countries? Why does FDI contribute to the
growth process of some countries and not the economic growth

of other countries? Does FDI generate positive externalities
(spillover) for the host country? What is the future implication
of FDI, FSD on growth in terms of projections?

Answers to the above questions are rather conflicting. This
might be based on the fact that the study employs a time series
analysis. The empirical evidence suggests that there are conflicting
effects of FDI on growth caused by different FSD indicators used.
However, on the average, it was found that FDI impacts positively
on the economic growth process. It is not in all cases that the
interactive effects of FSD indicators lead to growth thus negating
the hypothesis of Alfaro et al. (2003) about the importance of
FSD in FDI host countries.

Following this introductory section, we arranged the study
as follows: section two presents some stylized facts on FDI flows
as well as FSD indicators in the region while methodology is
provided in section three. Consequent upon this, empirical results
are presented in section four. Section five concludes that threshold
effect of FSD on FD $