Financial stability and the foreign direct investment – growth nexus

Boison Angmortey  Angmosi; Anthony Quame Qabitoo  Aboagye; Charles  Andoh

Boison Angmortey Angmosi Department of Finance, University of Ghana Business School, Accra, Ghana https://orcid.org/0000-0001-6962-774X
Anthony Quame Qabitoo Aboagye Department of Finance, University of Ghana Business School, Accra, Ghana https://orcid.org/0000-0002-2123-9980
Charles Andoh Department of Finance, University of Ghana Business School, Accra, Ghana https://orcid.org/0000-0001-7924-6756

Keywords: Economic growth, Financial stability, Foreign direct investments, sub-Saharan Africa (SSA)

Abstract

The role of financial stability in the relationship between foreign direct investments (FDI) and economic growth is examined to provide an understanding of the level of financial stability required for sub-Saharan Africa (SSA) economies to benefit from FDI. Both stocks and annual inflows of FDI are used in establishing the relationship between FDI and Growth, while assessing the moderating effects of financial stability in that relationship. The two-step system generalized method of moments (SGMM) estimator is used to analyse annual data for thirty-four (34) SSA economies from 2002 to 2021. The study reveals that FDI causes SSA economies to grow only in the presence of stable financial systems. FDI stocks and annual inflows tend to only drive economic growth in the presence of financial stability. The place of stable financial systems in ensuring sustained economic growth in SSA cannot be overemphasized, as its absence may cause other factors such as FDI which would have otherwise been beneficial, to rather be a curse.