Financial Development and Capital Inflows in Small Open Economies: A Focus on Foreign Direct Investments in West Africa Monetary Zone (WAMZ)

This study explores the implications of financial development on capital inflows in Small Open Economies with a focus on five countries (Nigeria, Ghana, Sierra Leone, Liberia, and Guinea) in the West Africa Monetary Zone (WAMZ). Using panel datasets, this study provides useful insights into the effects of financial development measured by financial access, depth and efficiency indexes on inflows of foreign direct investments (FDI) in the WAMZ. The estimation and presentation of static panels including pooled regression, fixed effects and random effects models as well as the Hausman test were provided. The results showed that the financial access index contributed positively to FDI inflows during the study period. The efficacy of financial services accessibility in attracting FDI into the WAMZ is demonstrated by this remarkable finding. The results also showed that the financial depth affected FDI inflows positively during the study period. This finding explains that the deepening of the financial sector through an increased ratio of the private sector credit to GDP has the potential to attract more FDI inflows to the study area. However, the financial efficiency index is not significant in attracting FDI to the WAMZ. This could be attributed to the inefficiency in the allocation of financial resources often associated with underdeveloped financial sectors in each of the countries in the study area. While this study provides meaningful evidence of the significant roles of financial access and depth indexes in attracting FDI to the WAMZ, it recommends that monetary authorities such as the CBN and deposit money banks should increase financial services access and deepen the financial sector to boost the capacity to serve both domestic and foreign investor and provide a good signal for inflows of FDI to the WAMZ.