The Relationship between FDI, Economic Growth and Financial Development in Cabo Verde

Abstract

This paper examines the relationship between foreign direct investment (FDI), economic growth and financial development in Cabo Verde for the period 1987-2014.The methodology involves the use of bound test approach to cointegration (ARDL) as well as the ECM-Granger causality analysis. The bound test indicated that there is a long-run relationship when the variable GDP and FDI are the dependent variable. Moreover, the results indicated that FDI has a positive effect on the economic growth in Cabo Verde. It also found a bidirectional causality between FDI and economic growth, i.e. FDI granger causes GDP and GDP granger cause FDI. Thus, we concluded that higher levels of FDI inflow mean higher levels of economic growth and vice versa for the economy of Cabo Verde. Furthermore, we found that both economic growth and domestic credit to private sector are important factors in stimulating the FDI into the country. These results found are important for the country policymakers to take appropriate measures to enhance and improve the condition for FDI inflow in Cabo Verde.