Investigating the Impact of Financial Development Channel on Domestic Investment in Sub-Saharan Africa

Abstract

Our study aims to investigate whether the Keynesian or Neoclassical view of the financial sector's impact on domestic investment is pertinent in the context of East, Central, and Southern Africa. Using panel data from nineteen African countries (1980-2020), the study employs the fixed effects with robust standard errors and without AR (1) disturbances’ assumption. Further, the paper estimates the fixed effects with country-specific effects and AR (1) disturbances’ assumption and adjusted for autocorrelation, finally, the study employs the random effects with instrumental variables to deal with the presence of endogeneity in the data. Our empirical results highlight a negative relationship between the financial factors and domestic investment in our study. The country fixed effect revealed globally a negative correlation with domestic investment. The empirical findings seem to support the neoclassical view; however, the pertinence of such a result is not effective in the context of Africa where the capital market is incomplete, and the rationing of credit and government inferences exist in the capital market, as it is contrary to the neoclassical assumptions of conventional models.