Financial Integration, Foreign Direct Investment and Growth: Panel Data Analysis for West African Economic Monetary Union countries (WAEMU)

Abstract

The main objective of this paper is to investigate the linkage between financial integration, foreign direct investment (FDI) and economic growth, of four West African countries namely Cote d’Ivoire, Benin, Senegal and Togo running the period of 1980 to 2014. To make the empirical investigation, I examine long-run equilibrium (cointegration) relationship among variables by using Pedroni (1997; 1999; 2000) procedure. Then, I estimate a dynamic panel system GMM estimator proposed by Blundell and Bond (1998) with fixed effects approaches by utilizing Hausman test (1978). Finally, to verify the robustness of our estimators, I additionally perform panel Ordinary Least Squares method (OLS) and Two Stages Least Squares method (TSLS) Cumby et al. (1983). The overall results from the regression show that foreign direct investment (FDI) is not an important determinant of economic growth West Africa. However, its effect is relatively low and statistically insignificant at the conventional level. In addition, I found that financial integration variable impacts negatively growth in the four countries cited above, which signifies that financial integration policy doesn’t allows financial system to be more efficient. Furthermore, the empirical results show that the effect of domestic own investment is globally positive and statistically significant for all countries when using panel least square framework. This stipulates that state own investment is determinant factors of economic growth in the region. The study finally suggests that structural strong macroeconomics reforms should be taken to strengthen policies through appropriate regulatory.