FDI Inflows and Financial Development in Ecowas: Causality Analysis in the Frequency Domain

Abstract

Many studies have attempted to highlight the causal relationship between the inflows of Foreign Direct Investments (FDI) and the financial development with mitigated success in African countries, especially in ECOWAS member countries. For the most part, these studies have simply showed the importance of FDI and financial development in achieving GDP. To refocus the debate, this article analyzes in ECOWAS member countries the causal relationship between our variables of interest using recent causality techniques: time domain Granger (1969), Toda and Yamamoto (1995) and Breitung and Candelon (2006). Overall, country-by-country estimates revealed evidence of significant links between FDI inflows and financial sector development in terms of unidirectional as well as bidirectional causalities. Essentially, the findings imply that policymakers should not only address the causal direction between FDI inflows and financial development but also whether it is temporal or permanent and therefore authorities must define measures to be taken accordingly.