1 FDI and Financial Market Development in Africa

Transcript:1 FDI and Financial Market Development in Africa:
1 FDI and Financial Market Development in Africa by Isaac Otchere, Carleton University Issouf Soumaré, Laval University (presenter) & Pierre Yourougou, Syracuse University 2011 African Economic Conference Addis Ababa, Ethiopia, October 25-28, 2011 2 Introduction The surge of Foreign Direct Investment (FDI) in emerging markets in the 90’s was mainly due to: Huge decline of commercial bank lending following the Bank crisis of the 80’s; Policy reforms (World Bank/IMF) in terms of liberalization of capital control and financial markets; Worldwide excess liquidity. Evolution of FDI in the World Africa 3 FDI holds steady in Africa during the recent crisis… 4 During the recent crisis, debt flows decline in 2008 by $15bn and Portfolio equity flows fell by $10bn in 2008 but … Net FDI inflows increased from $28.6bn to $32.4bn (Africa was the only continent to experience an increase) 5 Motivation The surge has renewed the research interest on the effects of FDI and its interaction with FMD and economic growth (Alfaro et al. (2004, 2010), Allen et al. (2010)): Theoretically, FDI accelerates economic growth through Transfer of technology and other resources Increased productivity by fostering competition Theoretical rationales for causal relationship between FDI and FMD: FDI net inflows would increase liquidity and depth of financial market, hence reduce the cost of capital and accelerate economic growth FDI would contribute to enhance transparency (listing on stock market) and enhance efficient allocation of capital resources and therefore increase economic growth Review of theoretical arguments FDI to FMD: Increase in FDI net inflows would lead to more financial intermediation (e.g. Desai et al. (2006), Henry (2000)). Companies involved in FDI more likely to be listed on local stock market Increase in FDI would reduce relative power of the elites in the economy and force them to adopt market friendly regulations (e.g., Kholdy & Sohrabian (2008), Rajan & Zingales (2003)). FMD to FDI Well functioning financial market perceived by foreign investors as sign of vitality, openness and market friendly environment, (e.g., Henry (2000)). Developed stock market increases the liquidity of listed companies and reduce the cost of capital, thus attract foreign investments (Desai et al. (2006), Henry (2000)). 6 7 Empirical hypothesis Several studies provide evidence of a link between FDI, FMD and economic growth, but not yet clear how FDI, FMD and growth interact with each other The aim of the paper is to fill this gap in the African context FM