FDI and Financial Market Development in Africa - Insights and Trends

FDI and Financial Market Development in Africa by Isaac Otchere, Carleton University Issouf Soumar , Laval University (presenter) & Pierre Yourougou, Syracuse University 2011 African Economic Conference Addis Ababa, Ethiopia, October 25-28, 2011 1

Introduction The surge of Foreign Direct Investment (FDI) in emerging markets in the 90 s was mainly due to: Huge decline of commercial bank lending following the Bank crisis of the 80 s; Policy reforms (World Bank/IMF) in terms of liberalization of capital control and financial markets; Worldwide excess liquidity. 2

Evolution of FDI in the World Net FDI per Region 140 450 South Asia Forecasts 400 120 LAC EE and Central Asia 350 100 East Asia and Pacific 300 Middle East 80 Africa USD (Billion) USD (Billion) 250 Grand Total (Right Scale) 60 200 Africa 40 150 20 100 - 50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (20) - 3

FDI holds steady in Africa during the recent crisis 35 Net Capital Inflows to Sub-Saharan Africa 30 25 20 $ billions 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 -5 Net Debt Inflows Net FDI Inflows Net Portfolio Equity Inflows During the recent crisis, debt flows decline in 2008 by $15bn and Portfolio equity flows fell by $10bn in 2008 but Net FDI inflows increased from $28.6bn to $32.4bn (Africa was the only continent to experience an increase) 4

Motivation The surge has renewed the research interest on the effects of FDI and its interaction with FMD and economic growth (Alfaro et al. (2004, 2010), Allen et al. (2010)): 1. Theoretically, FDI accelerates economic growth through Transfer of technology and other resources Increased productivity by fostering competition 2. Theoretical rationales for causal relationship between FDI and FMD: FDI net inflows would increase liquidity and depth of financial market, hence reduce the cost of capital and accelerate economic growth FDI would contribute to enhance transparency (listing on stock market) and enhance efficient allocation of capital resources and therefore increase economic growth 5

Review of theoretical arguments FDI to FMD: Increase in FDI net inflows would lead to more financial intermediation (e.g. Desai et al. (2006), Henry (2000)). Companies involved in FDI more likely to be listed on local stock market Increase in FDI would reduce relative power of the elites in the economy and force them to adopt market friendly regulations (e.g., Kholdy & Sohrabian (2008), Rajan & Zingales (2003)). FMD to FDI Well functioning financial market perceived by foreign investors as sign of vitality, openness and market friendly environment, (e.g., Henry (2000)). Developed stock market increases the liquidity of listed companies and reduce the cost of capital, thus attract foreign investments (Desai et al. (2006), Henry (2000)). 6

Empirical hypothesis Several studies provide evidence of a link between FDI, FMD and economic growth, but not yet clear how FDI, FMD and growth interact with each other The aim of the paper is to fill this gap in the African context FM in Africa are characterized by a lack of depth, broadness, liquidity and transparency. FDI can be an impetus for FMD Well functioning financial markets can contribute to a more efficient allocation of FDI resources and create value for investors, hence attract more FDI. Hence, we expect bidirectional causality between FDI and FMD Africa is a good laboratory to test the interaction and the direction of causality between FDI and FMD because of significant differences between African countries in terms of the level of FMD 7

Data and variables FDI and FMD variables as suggested by Alfaro (2004), Allen et al. (2010), Levine et al. (2000), Levine & Zervos (1998) FDI variables FDIGDP: FDI/GDP FDIGCF: FDI/GCF FMD variables STKMKTCAP: Stock market capitalisation / GDP STKTUR : Stock market turnover ratio STKVALTRA: Stock market value traded / GDP CREDIT: Total credit by financial intermediaries to private sector / GDP LLIAB: Liquid liabilities of the financial system/GDP CCB: Commercial bank assets/(Commercial bank + Central bank assets) Economic growth variable GDPGROWTH :Real GDP growth 8

Data and variables (Contd) Control variables based on previous studies: Asiedu (2002, 2006), Alfaro et al. (2004), Allen et al. (2010), Allen, Otchere and Senbet (2010), Levine et al. (2000), Gohou & Soumar (2011) Economic Policy Variables Size of economy; Education; Infrastructure; Government Spending; Inflation; Interest rate; Exchange rate; Openness; Natural resources; Current account balance Governance and institutional quality variables KKM index (developed by Kaufmann, Kraay and Mastruzzi (2009) from WGI): Average of six indicators (i-Voice and accountability, ii-Political stability and absence of violence, iii-Regulatory quality, iv-Government effectiveness, v-Rule of law, vi-Control of corruption) 9

Empirical analysis design We use panel data over period 1996-2009 Possible problems with earlier studies: Unobserved country specific effects Simultaneity bias not fully controlled (control for endogeneity) We conduct Granger causality between FDI and FMD variables We conduct multivariate regressions analysis: 3-Stage Least Squares (3SLS) Dynamic panel data estimation of Arellano-Bond 10

Table 4: Stationarity (Unit root tests) Panel A: Level Levin-Lin-Chu Test (LLC) Im-Pesaran-Shin (IPS) Variable Constant & trend Constant, but no trend Constant & trend Constant, but no trend FDIGDP STKMKTCAP STKTUR STKVALTRA CREDIT LLIAB CCB -7.499*** -1.14316 -2.47751*** -1.05656 -3.25776*** -1.33698* -4.50624 *** -15.19502*** 3.50631 -2.29759** -2.67864*** -4.70479 0.78938 3.22780 -3.326*** 2.682 -1.026 0.403 3.132 -1.396 -1.858 -4.099*** 1.791 -2.177** 1.976 0.028 -0.993 -0.536 Panel B: First Difference Levin-Lin-Chu Test (LLC) Im-Pesaran-Shin (IPS) Variable Constant & trend Constant, but no trend Constant & trend Constant, but no trend STKMKTCAP STKTUR STKVALTRA CREDIT LLIAB CCB -14.15338*** -10.93996*** -4.97696*** -9.82536 *** -10.25048*** -19.54699 *** -4.56505*** -9.91006*** -6.08797*** -9.35742*** -8.85864 *** -15.92566 *** -1.741** -7.008*** -4.325*** -6.120*** -2.786*** -3.656 *** -2.071** -9.096*** -7.050 *** -8.104*** -2.470*** -3.240 *** 11

Table 5: Causality tests Homogenous non causality test (HNC) Homogenous causality test (HC) Null hypothesis Wald FHNC- stat Critical value at 1% level 2.067 Wald FHC -stat Critical value at 1% level 2.106 2.576*** 2.587*** STKMKTCAP does not cause FDIGDP 5.791*** 2.067 6.161*** 2.106 FDIGDP does not cause STKMKTCAP 2.150*** 2.067 2.106 STKTUR does not cause FDIGDP 1.839** 3.038*** 2.067 2.993*** 2.106 FDIGDP does not cause STKTUR 2.729*** 2.406 2.752*** 2.469 STKVALTRA does not cause FDIGDP 6.878*** 2.406 7.161*** 2.469 FDIGDP does not cause STKVALTRA 2.244*** 1.544 2.135*** 1.550 CREDIT does not cause FDIGDP 3.820*** 1.544 3.835*** 1.550 FDIGDP does not cause CREDIT 3.944*** 1.382 2.915*** 1.342 LLIAB does not cause FDIGDP 2,460*** 1.382 2,400*** 1.342 FDIGDP does not cause LLIAB 6.260*** 1.339 4.369*** 1.342 CCB does not cause FDIGDP 3.092*** 1.339 2.763*** 1.342 FDIGDP does not cause CCB Bidirectional causality between FMD and FDI variables However, the causality structure is not homogenous 12

Multivariate analysis of the relationship between FDI & FMD Bi-directional relationship means FDI and FMD variables are endogenous FDI = a0 + a1FMD + a2 EDUCATION + a3 SIZE + a4 INFLATION + a5 OPENNESS + a6 INFRAS + a7 EXHRATE + a8 NATRES+ a9 GOVERNANCE, (4a) FMD = b0 + b1FDI + b2 BALANCE + b3 EDUCATION + b4 SIZE + b5 INFLATION + b6 EXHRATE + b7 INTRATE + b8 GOVERNANCE, (4b) 13

Table 6: 3SLS regression (All Africa) System 1 System 2 System 3 Dependent var. Intercept FDIGDP 0.159958 (0.71) FDIGDP 0.197556* (1.82) FDIGDP 0.084090 (0.43) STKMKTCAP -0.34414** STKTUR -0.31457** (-2.06) 1.660828** (2.67) STKVALTRA -0.24574** (-2.34) (-2.18) 1.335496*** 1.228609*** FDIGDP (3.82) (3.98) 0.362420*** 0.337097*** 0.535906*** FMD (3.64) (3.31) (4.38) BALANCE -0.00029 (-0.21) 0.001073 (1.01) 0.012376 (1.67) -0.00191 (-1.33) -0.00082 (-0.48) 0.002273* (1.70) 0.006763 (0.91) -0.00056 (-0.37) -0.00054 (-0.51) 0.001681** (2.10) 0.005257 (0.94) 0.000123 (0.12) EDUCATION -0.00011 (-0.17) -0.00571 (-0.56) 0.000385 (0.81) 0.003079 (0.14) -0.00393 (-0.57) 0.000010*** -0.00072 (-1.04) -0.00585 (-1.31) -0.00025 (-0.61) 0.000145 (0.01) 0.000043 (0.01) 0.000014*** -0.00056 (-0.92) -0.00084 (-0.10) -0.00009 (-0.23) 0.012717 (0.69) -0.00601 (-0.95) 0.000012*** SIZE INFLATION OPENNESS INFRAS -0.00002* (-1.89) -0.00002** (-2.33) EXHRATE -0.00000926 (-1.06) (3.11) (4.62) (4.31) NATRES 0.023825 (0.88) 0.032090 (1.42) 0.023198 (0.98) INTRATE -0.00078 (-0.39) -0.00979 (-0.39) 0.4617 44.70*** -0.00104 (-0.53) -0.02177 (-0.82) 0.1202 27.78*** 0.000216 (0.16) -0.01266 (-0.61) 0.4073 44.27*** KKM 0.011306 (0.58) 0.4989 51.38*** 0.01408 (0.93) 0.1879 46.78*** 0.024864 (1.33) 0.4924 58.57*** R-Square Chi2-stat Nb. Obs 41 41 48 48 40 40 14

Table 6: 3SLS regression (All Africa) System 4 System 5 System 6 Dependent var. Intercept FDIGDP -0.0551 (-0.83) FDIGDP -0.0210658 (-0.22) FDIGDP 0.0524777 (0.61) CREDIT 0.038313 (1.07) 0.572663*** LLIAB 0.0869543 (1.24) 0.4827481* (1.95) CCB -0.1506299 (-1.18) 0.0069127 (0.01) FDIGDP (6.08) 1.466143*** 0.4874153** 0.0557326 (0.32) FMD (6.12) (2.22) BALANCE -0.00000902 (-0.04) 0.000268 -0.0006928 (-0.77) 0.0001715 (0.41) -0.0036621 (-1.17) -0.0005129 (-0.91) -0.0002626 (-0.14) 0.0004948 (0.60) 0.0044963 (0.78) 0.0006258 (0.57) EDUCATION -0.00043 (-1.53) 0.003906 (1.31) 0.000298 (1.08) 0.002643 (0.35) -0.00079 (-0.32) -0.0001221 (-0.40) 0.0018782 (0.47) -0.0001067 (-0.42) 0.0111375 (0.89) -0.002427 (-0.47) 0.0000111*** -0.0003262 (-0.85) -0.0010103 (-0.27) -0.0001473 (-0.56) 0.006387 (0.50) 0.0017638 (0.25) 0.00000873** (1.52) -0.00243 (-1.47) -0.00027 (-1.30) SIZE INFLATION OPENNESS INFRAS 0.00000878** -0.00000489** -0.00000916** 0.0000184*** EXHRATE (2.31) (-2.45) (4.23) (-2.59) (2.37) (2.79) NATRES 0.000497 (0.05) 0.0092199 (0.81) 0.0045351 (0.39) INTRATE -0.00009 (-0.40) 0.005789 (1.27) -0.5634 66.45*** -0.0004189 (-0.51) 0.0062257 (0.81) 0.0564 17.16*** 0.0014911 (0.92) -0.0108419 (-0.72) 0.1713 20.56*** KKM -0.00569 (-0.67) -0.7767 55.96*** 0.0042639 (0.58) 0.0098 24.09*** 0.0001565 (0.02) 0.1478 19.15** R-Square Chi2-stat Nb. Obs 110 110 94 94 96 96 15

Table 7: 3SLS regression (excl. SA) System 1 System 2 System 3 Dependent var. Intercept FDIGDP 0.167344 (0.74) FDIGDP 0.161915 (0.66) FDIGDP 0.078005 (0.39) STKMKTCAP -0.34876** STKTUR -0.31591* (-1.83) 0.999645* (1.98) STKVALTRA -0.24920** (-2.35) (-2.20) 1.218810*** 1.123785*** FDIGDP (3.21) (3.42) 0.392695*** 0.329947* (1.91) 0.501869*** FMD (3.15) (3.75) BALANCE -0.00032 (-0.23) 0.001101 (1.03) -0.00110 (-0.63) 0.002005 (1.65) -0.00057 (-0.51) 0.001698** (2.12) EDUCATION -0.00009 (-0.14) -0.00064 (-0.76) -0.00049 (-0.80) LOG(GDPt-1) -0.00601 (-0.59) 0.000439 (0.89) 0.003669 (0.17) -0.00473 (-0.66) 0.012572 (1.69) -0.00188 (-1.29) -0.00453 (-0.42) -0.00023 (-0.47) 0.004546 (0.20) -0.00073 (-0.10) 0.009015 (1.05) -0.00153 (-0.98) -0.00071 (-0.08) -0.00012 (-0.29) 0.013521 (0.71) -0.00639 (-0.97) 0.005479 (0.98) 0.000087 (0.09) INFLATION OPENNESS INFRAS 0.0000099*** 0.000015*** 0.000012*** -0.00001** (-2.07) EXHRATE -0.00000815 (-0.92) -0.00001 (-1.17) (2.94) (4.21) (4.32) NATRES 0.023569 (0.87) 0.034969 (1.17) 0.026735 (1.08) INTRATE -0.00073 (-0.36) -0.01037 (-0.41) 0.4813 57.59*** -0.00249 (-1.13) -0.01869 -0.60 0.3873 31.42*** 0.000154 (0.11) -0.01307 (-0.64) 0.4073 44.27*** KKM 0.012446 (0.64) 0.6530 107.33*** 0.017576 (0.79) 0.4619 36.91*** 0.026133 (1.37) 0.4924 58.57*** R-Square Chi2-stat Nb. Obs 37 37 36 36 40 40 16

Table 7: 3SLS regression (excl. SA) System 4 System 5 System 6 Dependent var. Intercept FDIGDP 0.046188 (0.56) FDIGDP -0.0210658 (-0.22) FDIGDP 0.0524777 (0.61) CREDIT 0.055882 (1.09) 0.289262 (1.35) LLIAB 0.0869543 (1.24) 0.4827481** CCB -0.1506299 (-1.18) 0.0069127 (0.01) FDIGDP (1.95) 0.582876** (2.39) 0.4874153** 0.0557326 (0.32) FMD (2.22) BALANCE -0.00045 (-1.42) 0.000218 (1.08) -0.0006928 (-0.77) 0.0001715 (0.41) -0.0002626 (-0.14) 0.0004948 (0.60) EDUCATION -0.00027 (-1.05) -0.0001221 (-0.40) -0.0003262 (-0.85) LOG(GDPt-1) -0.00058 (-0.16) 0.000051 (0.21) -0.00876 (-0.67) 0.000854 (0.27) 0.000011*** -0.00243 (-1.06) -0.00041 (-1.51) 0.0018782 (0.47) -0.0001067 (-0.42) 0.0111375 (0.89) -0.002427 (-0.47) 0.0000111*** -0.0036621 (-1.17) -0.0005129 (-0.91) -0.0010103 (-0.27) -0.0001473 (-0.56) 0.006387 (0.50) 0.0017638 (0.25) 0.000000873** 0.0044963 (0.78) 0.0006258 (0.57) INFLATION OPENNESS INFRAS -0.00000916** 0.0000184*** EXHRATE -0.00000299 (-1.10) (4.66) (4.23) (-2.59) (2.37) (2.79) 0.020107* (1.68) NATRES 0.0092199 (0.81) 0.0045351 (0.39) INTRATE -0.00048 (-1.38) 0.015305*** -0.0004189 (-0.51) 0.0062257 (0.81) 0.0564 17.16** 0.0014911 (0.92) -0.0108419 (-0.72) 0.1713 20.56*** KKM 0.003450 (0.36) 0.0556 32.43*** 0.0042639 (0.58) 0.0098 24.09*** 0.0001565 (0.02) 0.1478 19.15** (3.00) 0.1103 36.75*** R-Square Chi2-stat Nb. Obs 84 84 94 94 96 96 17

Table 8: Arellano-Bond dynamic panel data estimation method System 1 System 2 System 3 Dependent var. Intercept FDIGDP -0.0823559 (0.748) FDIGDP 0.0267992 (0.16) FDIGDP -0.5720184 (-0.99) STKMKTCAP 0.0428963 STKTUR -0.0687898 (-0.18) 1.788271** (2.15) STKVALTRA -0.2722046 (0.13) (-1.02) 1.076492** (2.02) 1.15095** (2.38) FDIGDP 0.3068103*** 0.3541802*** 0.3824883*** FMD (2.52) (4.42) (4.10) -0.0124039* (-1.92) 0.0011273 BALANCE -0.0094952 (-1.54) 0.0023718 (1.56) 0.0002511 (0.02) -0.0085385** (-2.37) -0.0028184 (-1.08) 0.0012323** EDUCATION -0.0004001 (-0.94) 0.0059721 (0.57) 0.0000338 (0.06) 0.025627 (0.80) - 0.010339 (-0.91) -0.00052 (-1.36) 0.0022137 (0.32) -0.0010346 (-0.91) 0.0268895 (1.28) -0.0110066 (-1.54) 0.0005904 (0.480) 0.024587 (0.279) 0.0007482 (0.48) 0.0396046 (0.78) -0.0139164 (-1.18) (0.15) (2.19) SIZE 0.0077178 (0.37) -0.0136108* (-1.65) 0.0112601 (1.03) -0.0038349 (-1.43) INFLATION OPENNESS INFRAS 0.0000149*** 0.0000168*** 0.0000104*** EXHRATE 0.000002.6 (0.16) 0.0000162 (0.60) 0.00000159 (0.15) (2.87) (3.63) (3.23) NATRES 0.024523 (1.12) 0.0544678 (1.47) -0.066622 (-0.80) -0.0152624** -0.0181258* (-1.93) -0.0735696 (-0.67) INTRATE -0.0060098 (-1.19) 0.0069625 (0.28) (-2.07) 0.0420998** KKM 0.0331631 (1.44) 0.0153182 (0.37) 0.0094571 (0.61) (2.46) Nb. Obs Wald Chi-Stat Arellano-Bond test for AR(2) in first differences 56 60 66 54 45 62 725.55*** 65.02*** 587.52*** 103.30*** 317.53*** 316.78*** 1.09 -1.37 0.99 -0.03 1.22 0.85 P-value of Arellano-Bond test for AR(2) 0.275 0.171 0.324 0.979 0.221 0.393 Hansen test of over identification restrictions P-value of the Hansen test 1.08 0.983 5.23 0.155 6.87 0.143 2.34 0.505 0.19 0.667 1.57 0.814 18

Table 8: Arellano-Bond dynamic panel data estimation method System 4 FDIGDP -0.085851 (-0.71) System 5 System 6 FDIGDP -0.136891 (-0.71) Dependent var. Intercept FDIGDP -0.0792794 (-0.60) CREDIT 0.0445843 (0.59) 0.3604457** LLIAB 0.190122* (1.85) -0.0431061 (-0.28) CCB -0.2548022 (-0.41) 0.0851535 (0.84) FDIGDP (1.99) 1.447951*** 0.4236878** 0.0233151 (0.51) FMD (3.34) (2.22) BALANCE 0.0001984 (0.28) 0.000176 (0.56) -0.0023524 (-0.74) -0.0015038* (-1.71) -0.0000664 (-0.10) 0.0004646 (0.61) -0.0094011* (-1.65) -0.0002103 (-0.80) -0.0009779 (-0.35) -0.0000262 (-0.02) 0.0105976 (0.44) -0.0002545 (-0.54) EDUCATION 0 .0000849 (0.22) 0.0047194 (0.96) -0.0003167 (-1.02) 0.0097826 (0.58) -0.0074257 (-0.99) 0.0000105*** 0.0001884 (0.12) 0.0027857 (0.43) 0.0012486 (1.09) -0.0037089 (-0.14) 0.0023935 (0.21) 0.0000163* (1.76) -0.0233318 (-0.57) -0.0005519 (-0.70) 0.0067157 (0.93) 0.0001711 (0.64) 0.0323958 (1.23) 0.0004908 (0.12) 0.00000943** SIZE INFLATION OPENNESS INFRAS EXHRATE -0.00000248 (-0.90) -0.00000940 (-0.72) 0.0000255 (1.30) (4.61) (2.03) NATRES 0.0126686 (0.47) 0.004553 (0.13) INTRATE 0.0008451 (0.61) 0.0006491 (0.09) 0.000479 (0.56) -0.0160053 (-0.57) 0.0011839 (0.58) -0.003488 (-0.16) KKM 0.0047969 (0.24) -0.0151723 (-0.59) -0.0109673 (-0.45) Nb. Obs Wald Chi-Stat 84 108 152 190 154 237 89.56*** 31.93*** 20.54** 36.46* 22.69*** 22.12*** Arellano-Bond test for AR(2) in first differences 1.02 1.09 0.47 1.23 0.94 0.40 P-value of Arellano-Bond test for AR(2) 0.307 0.275 0.637 0.219 0.349 0.690 Hansen test of over identification restrictions P-value of the Hansen test 6.21 0.516 3.87 0.694 26.15 0.126 25.25 0.236 19.21 0.379 22.69 0.251 19

Simultaneous equations of FDI, FMD and Economic Growth FDI = a0 + a1 FMD + a2 GDPGROWTH + a3 EDUCATION + a4 SIZE + a5 INFLATION + a6 OPENNESS + a7 INFRAS + a8 EXHRATE + a9 NATRES+ a10 GOVERNANCE, (7a) FMD = b0 + b1 FDI + b2 GDPGROWTH + b3 BALANCE + b4 EDUCATION + b5 SIZE + b6 INFLATION + b7 EXHRATE + b8 INTRATE + b9 GOVERNANCE, (7b) GDPGROWTH = c0 + c1 FDI + c2 FMD + c3 EDUCATION + c4 SIZE + c5 INFLATION + c6 EXHRATE + c7 OPENNESS + c8 GOVSPEND + c9 GOVERNANCE, (7c) 20

Table 9: 3SLS regression System 1 System 2 System 3 Dependent var. FDIGDP GDPGROWTH FDIGDP GDPGROWTH FDIGDP GDPGROWTH STKMKTCAP STKTUR STKVALTRA -0.3049419* -0.3291349*** 36.22696* Intercept 0.2150613 0.3181815 7.583046 0.0354204 13.57511 -0.0532556 (1.40) (0.67) (0.50) (0.35) ( -1.75) (1.51) (-0.24) (-2.80) (1.96) 55.49079*** 1.063645*** 75.9272*** FDIGDP 0.6170663 29.59526 0.605628 (0.40) (0.91) (1.23) (2.84) (3.72) (4.29) 0.2636159* FMD 0.0120045 1.46236 0.0731887 6.452094 -7.709349 (0.18) (0.28) (0.58) (0.55) (1.68) (-0.54) 0.00892*** 0.0081864*** GDPGROWTH 0.0018609 -0.0119331 0.0045811 -0.0021186 (0.80) (-0.81) (3.02) (0.82) (3.66) (-0.59) BALANCE -.0248355 -0.0003633 -0.0006706 (-2.62) (-0.14) (-0.34) 0.0048243* 0.0021627** EDUCATION -0.000733 0.0123283 -0.0007741 0.004708 -0.000675 0.0010645 0.0575604 (-0.76) (1.79) (0.21) (-1.20) (2.40) (0.09) (-1.04) (1.28) (0.95) 0.0110639** SIZE -0.0060751 -0.0079238 -0.0777927 -0.0011811 0.00622 -0.4107643 0.0025191 -1.321267 (-0.74) (-0.42) (-0.11) (-0.29) (0.92) (-1.08) (0.26) (1.97) (-1.61) -0.0234605** -0.1676883** -0.1091528* INFLATION -0.0007777 -0.0000221 -0.0001039 -0.0457433 0.0005638 0.0004821 (-0.93) (-2.40) (-2.31) (-0.04) (-0.04) (-0.85) (0.88) (0.32) (-1.72) -3.16971* OPENNESS 0.017926 -0.5912154 0.0105513 -1.348809 0.0354435 (0.44) (-0.37) (0.48) (-1.11) (1.40) (-1.93) INFRAS -0.0092557 0.0016166 -0.0067467 (-0.72) (0.16) (-0.49) 0.0000134** 0.0000108*** 0.0000105*** -0.0000155** EXHRATE 0.0000246 0.0004619 -0.0000117 -0.0002186 -0.0006858 (2.50) (0.70) (0.95) (3.25) (-1.07) (-0.53) (3.18) (-2.29) (-1.65) NATRES 0.1824095 0.0677589 0.0951724 (1.29) (0.75) (0.76) -0.0247562*** INTRATE -0.0014259 -0.00000686 (-2.82) (-0.52) (-0.00) GOVSPEND -0.0993821 0.0460449 -0.1212028 (-0.67) (-0.51) (-0.84) -0.035651** KKM 0.038205 0.0257682 0.2034038 0.0090652 0.4727276 0.0220883 -0.0185049 1.108584 (1.00) (0.59) (0.25) (0.38) (-2.53) (0.57) (0.69) (-0.90) (0.59) R-Square 0.4659 0.0168 0.2547 0.1682 0.3873 0.1913 0.3488 0.5236 0.1701 36.95*** 23.50*** 44.15*** 27.77*** 17.28** 57.59*** 43.92*** 30.57*** Chi2-stat 11.47 Nb. Obs. 49 49 49 54 54 54 35 35 35 21

Table 9: 3SLS regression System 4 System 5 System 6 Dependent var. FDIGDP GDPGROWTH FDIGDP GDPGROWTH FDIGDP GDPGROWTH CREDIT LLIAB CCB 0.1267879* 0.0870826** 18.32872* Intercept -6.328609 0.040401 0.0893483 -3.074456 -0.0862189 0.0360533 (1.71) (2.13) (-0.82) (0.48) (1.20) (-0.41) (-0.38) (0.15) (1.69) 98.41792*** 0.4165927* 107.1053*** 77.80492*** FDIGDP 0.1010384 0.19727 (0.90) (6.00) (1.75) (6.15) (0.29) (3.02) FMD 0.2256548 17.17503 0.2409057 -5.281589 -0.0072907 7.133389 (1.16) (0.66) (1.53) (-0.31) (-0.07) (0.50) 0.0065409*** 0.0072278*** 0.005047* GDPGROWTH 0.000276 -0.0022461 0.0020257 (6.59) (0.32) (5.17) (-0.96) (1.89) (0.36) -0.0028545** BALANCE -0.0002426 0.0027274 (-0.52) (-2.53) (0.98) 0.0845117* EDUCATION -0.0004177 0.0001611 0.0177036 -0.00031 0.0008389 0.0235087 -0.0006712 -0.0002201 (-1.42) (0.71) (0.57) (-1.02) (1.62) (0.76) (-1.52) (-0.20) (1.82) -0.0035291* -0.923617* SIZE -0.0054638 0.3049316 -0.0018869 -0.0042256 0.1464866 0.0049394 -0.0025496 (-1.65) (-1.94) (0.86) (-0.51) (-1.25) (0.44) (0.50) (-0.25) (-1.89) -0.0013827* -0.1221618*** INFLATION 0.00000822 -0.000335 -0.0304851 0.0001402 -0.030637 0.000544 0.0011917 (0.02) (-0.88) (-0.66) (0.38) (-1.70) (-0.65) (0.91) (0.79) (-2.75) OPENNESS -0.0065837 -0.2868236 0.004615 -0.6864638 0 .0053684 -1.259837 (-0.64) (-0.24) (0.40) (-0.64) (0.27) (-1.00) 0.0056612* INFRAS 0.0006798 -0.0009627 (1.75) (0.16) (-0.10) 0.00000812*** 0.00000788*** -0.00000983** 0.00000719* 0.0000174** EXHRATE -0.0000017 -0.0003412 -0.0004804 -0.000347 (3.12) (-0.87) (-1.00) (2.96) (-2.53) (-1.33) (1.84) (2.20) (-0.73) NATRES 0.0102473 0.0168437 -0.0013088 (0.80) (1.20) (-0.04) -0.0017832* 0.0032452* INTRATE -0.0005642 (-1.31) (-1.94) (1.69) GOVSPEND 0.0492228 0.0770742 0.2215086 (0.58) (0.68) (0.92) 0.0112967*** KKM -0.0060577 0.3596055 0.0014738 -0.0000382 0.4234183 -0.0087346 0.0164753 0.7542755 (-0.86) (2.72) (0.47) (0.21) (-0.000) (0.60) (-0.55) (0.501) (0.74) R-Square 0.1038 0.1146 0.0651 0.0948 0.001 0.0442 0.2536 0.1979 0.0717 66.85*** 21.99*** 45.23*** 70.39*** 20.02** 54.28*** 38.21*** 21.87*** 36.24*** Chi2-stat Nb. Obs. 89 89 89 92 92 92 72 72 72 22

Conclusion We have shown that the causal relation between FDI and FMD is bi-directional FDI can foster financial market development Well functioning financial markets contribute to attract more FDI We also find that FDI impacts positively and significantly on economic growth in Africa when we control for the simultaneous effects of both FDI and FMD. Therefore studies involving both FDI and FMD should account for this potential endogeneity issue. 23