Foreign Direct Investment, Financial Development, and Intra-African Trade

Foreign Direct Investment (FDI) and trade are two critical drivers of economic integration and development, particularly for emerging regions such as Africa. The interplay between FDI and intraAfrican trade is complex and not yet fully understood. This study examines the interrelationship between FDI, financial development, and intra-African. Specifically, we examine the two-way relationship between FDI inflows and intra-African trade, investigate the threshold effect of FDI inflows on intra-African trade and examine the role of financial development on finance-trade nexus. By employing a sample of 54 African countries over the period, 2004 - 2022, and by using a twostep dynamic System Generalized Methods of Moments, the study presents interesting empirical findings. The results of the study show that intra-African trade negatively affects FDI inflows, however, the reverse is true only at a non-linear finance-trade nexus. Thus, the findings support that an initial increase in FDI inflows increases intra-African trade up to a certain threshold, then begins to decline at additional levels of FDI. This provides evidence to support an inverted U-shaped nonlinear relationship between FDI inflows and intra-African trade. The results indicate that the threshold impact of FDI on intra-African trade is more pronounced for relatively high growth economies compared with those in lower growth economies. The findings of the study suggests that financial development improves intra-African trade and show that FDI and financial development are complements in the determination of intra-African trade. The results, however, provide evidence to support that the positive linear effect of FDI inflows on intra-African trade is reduced when African countries experience an increase in the level of financial development. To transform the intra-African trade, there should be a steadily increasing complementarity between FDI, and financial development needed to foster trade. The positive role of financial development in promoting intra-African trade suggests that African countries should invest more strategically in their financial sectors, while carefully managing FDI inflows to ensure they contribute to trade-enhancing outcomes. A coordinated approach that aligns FDI with financial sector development is crucial for realizing the transformative potential of the African Continental Free Trade Area (AfCFTA).