Foreign Direct Investment and Industrialisation in Sub-Saharan Africa: The Role of Financial Institutions Development

Abstract

The objective of the study was to analyse the role of financial institutions development in the link between FDI and industrialisation in SSA. Employing the static model (Fixed Effect Model) and the dynamic model (Generalised Method of Moments), the study utilises a panel model of 45 countries in SSA spanning the period 1990 to 2009. The findings of the study reveal that previous year output of the manufacturing industry is very essential to the industrialisation process in SSA. Additionally, FDI has a significant but negative link with the output of the manufacturing sector. Similarly, financial institutional development has a negative effect on industrialisation. However, the results indicate that the interaction between FDI and the financial institution variable has a positive and significant effect on industrialisation. The results also show that Gross Domestic Product per capita (GDPC) has a significant and positive effect on industrialisation. Based on the findings of the study, SSA countries should implement measures to streamline FDI inflows into the manufacturing industry as well as formulate and implement important industrial policies. To promote effective industrialisation, SSA countries should improve the resilience of their financial system in order to positively intermediate FDI inflows into the manufacturing industry.

Key words: Industrialisation, Foreign Direct Investment, Financial institution, Gross Domestic Product, Export, Inflation, Human capital and Population.