The Impact of Foreign Direct Investment in Africa’s Economic Growth: The Mediating Role of Financial Development

Abstract

Foreign direct investment (FDI) and the development of domestic financial systems are two key factors influencing growth in many countries worldwide. This study investigates the impact of FDI on the economic growth of African countries with emphasis on the mediating role of financial development. The study examines 43 African Countries over a period spanning from 2010 to 2024 using longitudinal data.   The study employs Fixed Effects Regression analysis based on the results of the Hausman Test conducted. The results indicate that FDI exhibits a statistically insignificant negative relationship with economic growth. Also, the effect of financial development on economic growth is negative and significant. However, the interaction coefficient between FDI and financial development exhibited a positive, albeit non-significant, impact on the economic growth of African Countries. The study recommends implementing policies to deepen financial markets in African countries.  Additionally, policymakers should de-emphasise the FDI volume inflows. Instead, governments should target productive and technology-intensive FDI that focuses on sectors like manufacturing, renewable energy, and ICT. Finally, African country governments should invest in Human Capital to strengthen the strong positive link between human capital, productivity and growth, through increased investment in education, technical skills, and healthcare.