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Financial globalization and institutions in Africa: the case of foreign direct investment, central bank independence and political institutions

Published online by Cambridge University Press:  08 June 2020

Abel Mawuko Agoba Open the ORCID record for Abel Mawuko Agoba [Opens in a new window] ,
Elikplimi Agbloyor ,
Afua Agyapomaa Gyeke-Dako  and
Mac-Clara Acquah
Abel Mawuko Agoba
Affiliation:
Department of Banking and Finance, Central University, Tema, Ghana
Elikplimi Agbloyor*
Affiliation:
Department of Finance, University of Ghana Business School, University of Ghana, Legon, Accra, Ghana StellenBosch Business School, StellenBosch University, StellenBosch, South Africa
Afua Agyapomaa Gyeke-Dako
Affiliation:
Department of Finance, University of Ghana Business School, University of Ghana, Legon, Accra, Ghana
Mac-Clara Acquah
Affiliation:
Zenith University College, Trade Fair, Accra, Ghana
*
*Corresponding author. Email: ekagbloyor@gmail.com
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Abstract

In this paper, we examine the bi-directional relationship between financial globalization (proxied by foreign direct investment (FDI) flows) and economic institutions (proxied by central bank independence (CBI)) taking into consideration the role of political institutions. We test our argument on a sample of 48 African countries (1970–2012) using a two-step System Generalized Methods of Moments, with collapsed instruments and Windmeijer robust standard errors. Using two proxies for CBI, the study finds that while legal CBI does not have a significant impact on FDI, high central bank governor turnover rates have a significantly negative impact on FDI inflows. However, higher levels of political institutions significantly enhance the impact of legal CBI on FDI inflows, and dampen the impact of high central bank governor turnover rates on FDI inflows. The study also shows that, higher FDI inflows have a significantly positive impact on both legal and de facto CBI. This impact is accelerated in countries characterized by higher levels of political institutions.

Keywords

Africacentral bank independencefinancial globalizationforeign direct investmentpolitical institutions

JEL classification

P45: International Trade, Finance, Investment, and Aid P16: Political Economy O43: Institutions and Growth
Type
Research Article
Information
Journal of Institutional Economics , Volume 16 , Issue 6 , December 2020 , pp. 931 - 953
Copyright
Copyright © Millennium Economics Ltd 2020

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