The African Financial Review July-August 2014 | Page 46

Figure 1. Trends in FDI and growth in East
Africa.

Figure 2. Trends in FDI and growth in West
Africa.

Figure 3. Trends in FDI and growth in North
Africa.

46 | The African Financial Review

classified as high FSD countries. The low FSD countries are
Algeria (DCP and DCB), Ethiopia, Kenya and Tunisia (LLY)
and Zimbabwe (DCB). On the other side of the triangle are
Zimbabwe (LLY), Kenya and Ethiopia (DCB and DCP) and
Ethiopia (DCP). In addition to this, Cote d’Ivoire, Congo
Republic, Democratic Republic of Congo, Nigeria and Tanzania,
Zambia and Cameroun all had the three FSD indicators in the
low classification.

In terms of country classification, Democratic Republic
of Congo requires that the level of development of her financial
sector must reach at least 10 percent for LLY while the remaining
indicators have no role to play in the FDI-growth nexus following
the arguments of Alfaro et al (2000). This is because the required
value of development of DCB and DCP is zero. Egypt requires
that the level of development of DCB and DCP must reach a
hallmark of 70 and 35 percent respectively before the benefit(s)
of FDI can accrue to the country.

Ghana can be grouped in the region of low countries FSD.
This can be justified by the fact that the level of advancement of
DCP and DCB are very low which stood at 1 and 35 percent
respectively. In Nigeria, DCB has no role to play following the
argument of King and Levine (2003), and Alfaro et al (2000).
This is because the level of DCB required is negative. Contrary
to this, DCP and LLY require 4 and 30 percent respectively.

However, this is in contrast to the case of South Africa
which can be regarded as a very high FSD country. In order
to ensure positive correlation between FDI and growth, this
condition must be satisfied: LLY’s level of development must
reach 55 percents of the country’s GDP ratio while that of DCB
and DCP’s advancement must reach a minimum level of 150
and 120 respectively. This development is detrimental to the
growth process of the economy because the required level of
FSD indicators is extremely high. The chances of the country
achieving these goals look unrealistic.

On indicator based classification, DCB has the highest
required level of FSD. This is closely followed by DCP and
LLY. A plausible reason for this is hard to proffer. However,
possible reasons for this could be attributed to the fact that DCB
is the most active indicator when compared to others. Besides,
governments of most SSA countries take the lead role in economic
participation and the private sector is left to play second fiddle
role in the economy.

It is interesting to note that economic growth which is being
experienced in countries like the Congo Republic, Egypt, Tunisia,
South Africa and Zimbabwe are not caused by FDI. Thus, it is
imperative to state categorically that other factors of economic
growth other than FDI have been beneficial in such countries.
Thus, governments in such countries should develop their financial
sector to the required level so as to achieve the benefits of FDI.
In addition to this, Democratic Republic of Congo is the only
country whose different FSD indicators were able to reach the
requisite thresholds. Also, five countries were able to attain the
threshold value for only two FSD indicators while others were
unable to reach the threshold value, thus, implying that growth
of such countries is not attributable to FDI.
3
In the standard growth literature, there are over 70 variables that serve as

determinant of growth but only 17 of them are statistical ly robust to deserve

inclusion in growth regressions (Carmignani and Chowdhury, 2008 and Sala-i
Martin and Subramanian, 2003). Due to data availability, this is further reduced

to four which are government consumption, inflation, trade openness and urban
agglomeration.