By <span><a href="https://theconversation.com/profiles/muazu-ibrahim-966673">Muazu Ibrahim</a>, <em><a href="https://theconversation.com/institutions/university-for-development-studies-3706">University for Development Studies</a></em></span>

<p>Economic growth is driven by a number of factors. These include foreign direct investment, national savings, household spending, fiscal and monetary policies. Since the late 1980s African governments have fully embraced foreign direct investment as a major driver of growth. </p>

<p>One of the avenues through which countries have sought to attract more foreign direct investment has been investment summits. These are hosted jointly with developed countries. They include the <a href="https://www.odi.org/blogs/10674-focac-2018-what-expect-next-weeks-china-africa-summit">Africa-China Investment Summit</a>, <a href="https://www.un.org/africarenewal/news/first-uk-africa-investment-summit-signals-post-brexit-plans-continent">Africa-UK Investment Summit</a> and the <a href="https://www.businessghana.com/site/news/business/199915/2020-U-S-Africa-Business-Summit-to-be-Hosted-in-Morocco">Africa-US Investment Summit</a>.</p>

<p>Despite these efforts, <a href="https://unctad.org/en/PublicationsLibrary/wir2019_en.pdf">data</a> shows that Africa has not been a major <a href="https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=ZG">recipient</a> of these flows. In fact, it attracts a lot less than other developing countries. </p>

<p>There’s a bigger problem too – the impact on economic growth of the foreign direct investment the continent attracts is lower than other comparable parts of the world. In <a href="https://www.tandfonline.com/doi/full/10.1080/20430795.2019.1683504">our research</a> we set out to understand why. To do this, we looked at the financial services sector which is underdeveloped in most African countries.</p>

<h2>The search</h2>

<p>We examined <a href="https://www.tandfonline.com/doi/full/10.1080/20430795.2019.1683504">data</a> from 45 countries between 1980 and 2016. The variables we looked at included economic growth, foreign direct investment, financial sector development, human capital, government expenditure and gross fixed capital formation. </p>

<p>The countries were selected based on data availability. They comprised several countries from all the regional blocs, including six countries from Northern Africa.</p>

<p>Overall, the countinent’s financial sector is under-developed compared to other emerging economies, with the exception of South Africa which is relatively well-developed. The countries’ financial sectors are bank-based, thus providing limited space for the equity (capital) markets. </p>

<p>We sought to examine the relationship among three factors: foreign direct investment, economic growth, and financial sector development. Financial sector development measures a country’s financial institutions to make financial services available to citizens. It also includes the provision of finance to businesses.</p>

<p>There has been a lot of economic literature on the impact of foreign direct investment on economic growth. And there have been many <a href="https://www.researchgate.net/publication/266079304_FOREIGN_DIRECT_INVESTMENT_FINANCIAL_SECTOR_DEVELOPMENT_ECONOMIC_GROWTH_EMPIRICAL_EVIDENCE_ON_LINKS_FROM_GHANA_INTRODUCTION">studies</a> on the linkages between foreign direct investment, financial sectors and economic growth. But less has been done on the extent to which Africa’s financial sector is a conduit through which foreign direct investment drives economic growth.</p>

<p><a href="https://www.mdpi.com/1911-8074/12/4/176/pdf">Research</a> findings on the impact of foreign direct investment on a country’s economic growth are mixed. This implies that the extent of the impact is determined by other <a href="https://www.researchgate.net/publication/325657823_The_Impact_of_Foreign_Direct_Investment_on_Economic_Growth_a_Causal_Study_in_the_United_States">factors</a> and characteristics of a country’s economy. </p>

<p>That’s why we chose to look at how the financial sector, in particular its stage of development, can moderate the impact of foreign direct investment on economic growth.</p>

<h2>What attracts foreign direct investment</h2>

<p>For the most part, foreign direct investment inflows to Africa have generally been attributed to five factors. These are regulations (ease of doing business), the general investment climate, broader economic reforms, information communication and technology development, and improvements in infrastructure.</p>

<p>Foreign direct investment plays an important role in economic development. It provides financial resources, technological spillovers and improvement in human capital. These are all critical factors that can spur Africa’s economic development by addressing infrastructural deficits and reducing unemployment. </p>

<p>The effect of foreign direct investment on economic growth is well documented globally. Funds from foreign investors are channelled through a country’s financial system before being allocated to the targeted beneficiary of the investment. </p>

<p>In Africa’s case we <a href="https://www.tandfonline.com/doi/full/10.1080/20430795.2019.1683504">found</a> that the continent’s underdeveloped financial sector has dampened the impact of foreign direct investment on economic growth. </p>

<p>To measure financial sector development we calculated credit provided by the financial sector to the private sector as a percentage of GDP. On this measure, Africa’s financial sector fails to allocate financial resources effectively and efficiently to the productive sectors of the economy. </p>

<p>When the financial sector does allocate resources, it invests in risky projects. The net effect is that it hurts economic growth and therefore fails to support foreign direct investment.</p>

<h2>What’s to be done</h2>

<p>Foreign direct investment inflows to Africa are increasing, albeit marginally. What our study shows is that African governments need to spend more effort on maximising the impact of foreign direct investment on economic growth. This is over and above current efforts to gain a bigger share of global foreign direct investment flows. Failure to raise the impact of foreign direct investment on economic growth will mean that African countries will not fully benefit from higher inflows.</p>

<p>Improving the performance of the financial sector should be one of the major preoccupations of African policymakers. This should include regulators improving their supervisory roles. And they should strengthen the financial sector’s ability to allocate resources effectively to the productive sectors of the economy. Improvements in corporate governance and risk management strategies would also help.</p>

<p><em>This article was co-authored with Abraham Mensah Acquah. He holds BA (Integrated Business Studies) and a Master of Commerce degree in Banking and Finance from the School of Business and Law, University for Development Studies, Wa, Ghana.</em><img loading="lazy" decoding="async" src="https://counter.theconversation.com/content/131856/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important" /></p>

<p><span><a href="https://theconversation.com/profiles/muazu-ibrahim-966673">Muazu Ibrahim</a>, Lecturer, Department of Banking and Finance, <em><a href="https://theconversation.com/institutions/university-for-development-studies-3706">University for Development Studies</a></em></span></p>

<p>This article is republished from <a href="http://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/african-countries-arent-getting-as-much-as-they-should-from-foreign-direct-investment-131856">original article</a>.</p>

Wikimedia Commons_Foreign Direct Investment

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<p>ADDIS ABABA, Feb 18 (Reuters) &#8211; The United States will provide financial assistance to Ethiopia as it pursues political reforms, the office of Ethiopian Prime Minister Abiy Ahmed said on Tuesday during a visit by U.S. Secretary of State Mike Pompeo.</p>



<p>&#8220;An agreement has been reached regarding the strengthening of the holistic and ongoing reform in Ethiopia to which the United States Government plans to provide substantial financial support,&#8221; the statement said.</p>



<p>Neither Pompeo nor Abiy provided further details. Ethiopia, Africa&#8217;s second-most populous nation, has long been an ally of the United States, which supplies about $1 billion in aid annually.</p>



<p>Pompeo praised political reforms Abiy has spearheaded ahead of Ethiopia&#8217;s upcoming elections. Ethiopians are due vote on Aug. 29 in a balllot Abiy has promised will be free and fair in a bold break from decades of repression.</p>



<p>&#8220;A free and credible vote will show that there is no false choice between democracy and security and it will ensure that everyone has a choice,&#8221; Pompeo told reporters.</p>



<p>Abiy took power in 2018 following years of anti-government protests. He freed thousands of political prisoners, won the Nobel Peace Prize for ending a long-running conflict with neighbouring Eritrea, and put prominent dissidents and human rights activists in positions of power.</p>



<p>&#8220;These aren&#8217;t reforms imposed by somebody on the outside. These were reforms that came from Ethiopian people,&#8221; Pompeo said.</p>



<p>A senior U.S. State Department official told pool reporters said Abiy appeared committed to holding elections on time, although he said Ethiopian security agencies &#8211; long used to suppressing political opposition &#8211; might need some more training on respecting human rights.</p>



<p>Abiy&#8217;s reforms, while applauded abroad, have also unleashed simmering ethnic and political tensions at home as regional powerbrokers jockey for position. More than 2 million of Ethiopia&#8217;s 109 million citizens have been displaced, according to the United Nations.</p>



<p>&#8220;The most important challenge for us is security,&#8221; Ethiopia&#8217;s foreign minister Gedu Andargachew told reporters. &#8220;Most of our youth have no job… this situation is difficult to maintain peace and order.&#8221;</p>



<p>Abiy has also overseen economic reforms, promising to open its bureaucratic, state-run economy to foreign investment and liberalise the telecoms and banking sectors. Ethiopia struggles with foreign exchange shortages that inhibit investment. Gedu also said there had been &#8220;progress&#8221; in a dispute that the U.S. Treasury has been trying to mediate between Ethiopia and Egypt over Ethiopia&#8217;s giant Blue Nile hydropower dam.</p>



<p>Pompeo is on a tour that has already taken him to Germany, Senegal and Angola. His visit comes as some African governments are questioning U.S. President Donald Trump&#8217;s commitment to their continent. </p>



<p>(Additional reporting from pool reporters, Editing by Angus MacSwan Writing by Katharine Houreld)</p>


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