The African Business Review May-Jun 2014 | Page 39

Table 2. Share of FDI flows to developing countries by region, 19751-2010 (in percent).
1975- 84 1985-94 1995 - 99 2000 - 04
Developing Economies
Africa

Caribbean and American
Asia

Oceania

LDCs

100

9.35

38.01

48.93
0.71

2.99

100

100

8.22

100

4.81

28.23

7.25

41.13

60.76

36.18

51.77

0.57

52.68

0.19

2.19

0.11

2.07

3.77

2005 - 10
100

9.56

32.51
53.49
0.23

4.21

Source: Author’s Computation from UNCTADSTAT, 2011.

the 1980s has often been appositely labeled as a “lost” one for
the majority of countries in the continent. The scarcity of the
necessary capital flows for sustained economic growth has been
identified as one major clog in the wheel of economic prosperity
Africa wide. FDI, a critical component of these flows, according to
Ajayi (2006) has the potential to accelerate growth and economic
transformation. Although FDI to developing countries as a whole
appears to have risen over the period between 1991 and 2002,
these flows have been largely uneven with Africa at the lowest
step of the ladder. For instance, Africa’s share of total FDI to
developing countries plummeted from about 19 per cent in d
1970s to a little less than 10 per cent in 1980s, and declined in
the 1990s to an annual average of 4 per cent (UNCTAD, 2003).

This poor performance, on the basis of FDI inflow metric,
however masks significant disparities among African countries in

Africa’s share of total FDI to developing
countries plummeted from about 19 per cent
in the 1970s to a little less than 10 per cent in
the 1980s, and declined in the 1990s to an
annual average of 4 per cent (UNCTAD, 2003).
general. Nigeria, chiefly due to its large oil sector, has traditionally
been one of the biggest recipients of FDI inflows to Africa. Most
other countries in the sub- region have however been unable to
attract substantial amounts of foreign capital. Figures 1-5 (see
overleaf ) display the proportion of FDI as a percentage share of
GDP (FDI) of the five regions under scope in Africa as well as
the trends in the growth of real GDP per capita (GDP).

The figures depict that higher FDI flows are associated with
favourable growth performance in Central and North Africa. In
North Africa for instance between 1975 and 1990, FDI flow has
been fluctuating in the region of 0.5 to about 4.8 per cent while
the growth pattern has oscillated between 0.3 and 9.2 per cent.
In the late 19th to early 20th century, the region experienced FDI
drought which coincided with a sharp drop in growth rate of the
region. However, FDI picked again in 2005, the region recorded
the highest flow and subsequent years experienced a slight fall in
the flow. As expected, growth trend follows the same pattern. This
same argument can also be made in the case of Central Africa
with the exception that the country recorded a negative growth
rate of about 4.8, 1.1 and 0.1 per cent in 1975, 1986, 1992 and
2001 respectively.

Another glimpse at the figures reveals, however, that

Southern, East and West Africa each share striking similarities
as well as sharp contrasts with the patterns observed in FDI in
the case of North and Southern Africa. The former regions all
witness a relatively increasing trend of FDI till the 19th century
before a sudden rise years in succession, though the proportion
is quite smaller than that of the latter. All through 1986 to 1994,
Central Africa witnessed a negative growth values between 0.2
and 6 per cent.

Thus, the statistics seem to reveal considerable differences
among these ECOWAS countries, implying that the potential
FDI possesses in fostering economic growth could differ in
significant ways across these countries. There is, therefore, the need
to dig a bit further into the economic peculiarities of individual
countries. In respect of this, one key factor that distinguishes
economies is the extent to which the financial market is developed.
It is usually opined that a well functioning financial system is
an important element of the absorptive capacity required in the
recipient economy for FDI to spur growth (Adeniyi et al., 2012).

Methodological issues

The three proxies we used to measure FSD are Domestic Credit
Provided by Private Sector; Liquidity Liabilities (M3), and
Domestic Credit Provided by the Banking Sector. The model
specified follows that of Azman-Saini et al. (2010),

Yt = α1Xt +

{

β1FDIt + ε1, FIN < γ1
β2FDIt + ε2,

FIN > γ2

where
Yt = real gross domestic product growth rate
Xt = set of control variables[3].
FDI = ratio of net inflow of FDI/GDP
FIN = indicator for FSD.
Equation (I) can be re-written as follows;
Yt = βt FDIt [D(FIN ≤γ)] + β2FDIt [D(FINt > γ1)] + ∝’Xt + ε
.......(2)
Where D = dummy variable which is 1 if FINt > γ1 and 0 if
otherwise
In recent years, Ordinary Least Square has been the most
common estimation technique for both time series and panel

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