BASED ON THESE LATTER STUDIES FINANCIAL DEVELOPMENT
Basedonthese latterstudies,financialdevelopment enhances aneconomy’s capacitytogain from FDI in three main ways. First, host country entrepreneurs with limited accessto domestic funds are able to buy newmachines, adoptstate-of-the-art technology and attractskilled labour owing to expanded credit availability. Second, domestic financialsector development easesthe credit constraint faced by foreign firms and thus aids in the extension of innovative activities to the domestic economy. Finally, the existence of an efficient financial system facilitates FDI in creating backward linkages with the rest of the economy particularly domestic suppliers of production inputs. Thus, domestic financial system sophistication potentially plays a key role in an host economy’s ability to absorb the benefits of FDI. Finance, through its interaction with FDI, then enters as an explanation for economic growth. Therefore, while the literature amply coversthe linkage between foreign direct investment and growth in both developed and developing countries, the specific strand that demonstrates a role for financial development in the FDI-growth nexus is at best rudimentary. Furthermore, most of these typically scant empirical attempts were conducted either purely for developed countries orwith samples of countriesthat include a fewfromAfrica.To fill this void, therefore, the present paper delves into a number of issues quite inventively. First, the FDI-growthfinancial development linkage is examined with specific reference to a group of ECOWAS countries. Asfar aswe know, empiricalworks on thistripartite relationship are hardly available for this regional grouping. Second, a country-by-country time-series approach is adopted implying that policy presсrіptions are more likely to be based on evidences peculiar to each country. Third and not the least, we use multiple measures of financial development to reflect the variations in the policy implications relatable to these conceptually distinct indicators of financial system advancement. Basedonthese latterstudies,financialdevelopment enhances aneconomy’s capacitytogain from FDI in three main ways. First, host country entrepreneurs with limited accessto domestic funds are able to buy newmachines, adoptstate-of-the-art technology and attractskilled labour owing to expanded credit availability. Second, domestic financialsector development easesthe credit constraint faced by foreign firms and thus aids in the extension of innovative activities to the domestic economy. Finally, the existence of an efficient financial system facilitates FDI in creating backward linkages with the rest of the economy particularly domestic suppliers of production inputs. Thus, domestic financial system sophistication potentially plays a key role in an host economy’s ability to absorb the benefits of FDI. Finance, through its interaction with FDI, then enters as an explanation for economic growth. Therefore, while the literature amply coversthe linkage between foreign direct investment and growth in both developed and developing countries, the specific strand that demonstrates a role for financial development in the FDI-growth nexus is at best rudimentary. Furthermore, most of these typically scant empirical attempts were conducted either purely for developed countries orwith samples of countriesthat include a fewfromAfrica.To fill this void, therefore, the present paper delves into a number of issues quite inventively. First, the FDI-growthfinancial development linkage is examined with specific reference to a group of ECOWAS countries. Asfar aswe know, empiricalworks on thistripartite relationship are hardly available for this regional grouping. Second, a country-by-country time-series approach is adopted implying that policy presсrіptions are more likely to be based on evidences peculiar to each country. Third and not the least, we use multiple measures of financial development to reflect the variations in the policy implications relatable to these conceptually distinct indicators of financial system advancement.
