Complementary Relationship Between Foreign Direct Investment, Banking Sector Threshold and Economic Growth: Empirical Evidence for the 18 Least Developed African Countries

The optimal allocation of foreign resources requires a minimum level of domestic development, including financial development to benefit from the potential benefits of foreign direct investment. This study discusses the mediating role of financial development in the effect of foreign direct investment on economic growth and establishes the banking sector threshold for the 18 least developed African countries over the period 2000 to 2020. We used the generalized method of moments (GMM) and the threshold regression (TR) as part of the dynamic panel data model. The results show the non-significant contribution of foreign direct investment and the banking sector to economic growth. After interaction, the effect of foreign direct investment becomes positive but not significant. However, the coefficient of the interaction variable is significantly negative. This implies that the financial system is unable to allocate foreign resources efficiently. For this reason, this paper resorted to applying the threshold regression to determine the minimum threshold of the banking sector and established a threshold of 74.58%. It therefore becomes necessary for the 18 least developed African countries to develop the financial system in order to get full benefits of foreign direct investment.