Financial Development, Globalization and Foreign Direct Investment Nexus: An Empirical Studies from Africa.
The paper examined how globalization influences the relationship between financial development and foreign direct investment (FDI) in Africa. In order to provide meaningful policy implications, the study divided financial development into two dimensions: the financial institution index (FII) and the financial markets index (FMI). Likewise, globalization was disaggregated into its political, social, and economic aspects. By employing a two-stage least squares approach, the study discovered that both financial development and globalization exerted a positive influence on FDI in Africa. However, when examining financial development in more detail, it was observed that only the FMI directly impacted FDI inflows, whereas the FII did not exhibit a significant effect. Regarding the various components of globalization, political globalization exhibited a synergistic relationship with the financial development index, while social globalization emerged as the most attractive component, drawing in more FDI compared to other dimensions. The dependent variable, FDI, was measured using FDI inflows as a percentage of GDP, obtained from the World Development Indicators (WDI). The main variables of interest are financial development and globalization. Financial development was quantified using the financial development index (MFD) developed by Svirydzenka (2016), which can be obtained from the International Monetary Fund (IMF). Globalization was measured using the globalization index, which is calculated as a weighted average of economic globalization (36%), social globalization (38%), and political globalization (26%). This comprehensive metric provides more meaningful insights compared to alternative indicators, such as the proportion of imports or exports to GDP or trade openness. The globalization index used in this study was sourced from the Konjunkturforschungsstelle (KOF). In our analysis, we have included six (6) control variables base on various demographic factors specific to Africa, as well as factors supported by existing literature. These control variables encompass a range of dimensions. Trade openness is considered, measured as net trade (% GDP). Also, economic growth is taken into account, represented by GDP growth. Domestic capital is included, measured by gross capital formation (%GDP). infrastructure is considered, (number of mobile subscribers per 100 people(. Inflation is also taken into account, measured by the annual consumer price inflation (%). Institutional quality is considered, which is an average of six institutional quality variables: corruption control, voice and accountability, rule of law, political stability and absence of violence, government effectiveness, and regulatory quality. These control variables were chosen based on their relevance and availability of data.
Steps to reproduce
Step 1: The Microsoft Excel data file was imported into STATA 17 for analysis, and necessary data cleaning procedures were conducted. One aspect of the data cleaning involved transforming the financial development index data from decimals to percentages by multiplying them by 100. This conversion was necessary because most variables in the dataset were originally expressed as percentages. We also created the interaction variables. Step 2: We conducted our basic pretest such as correlation and descriptive test. Step 3: We run our two-stage least squares for 19 models.