Nexus Between Foreign Divestment, Financial Development and Economic Growth in African Countries: GMM Approach
DOI:
https://doi.org/10.51137/wrp.ijarbm.474Keywords:
Economic Growth, Foreign Divestment, Self-Determination Theory, Financial Development, Africa, GMMAbstract
This article is one of the first initial investigations to thoroughly examine the relationship between foreign divestment, financial development, and economic growth in African countries, providing empirical evidence to help policymakers align investment strategies and promote stable economic conditions in various African contexts. The objective of this paper is to examine the relationships between foreign divestment, financial development, and economic growth in African countries, emphasising the multifaceted socio-economic factors that affect these interactions. Employing a 2-step difference Generalised Method of Moments (GMM), we examine panel data from 35 African nations over a span of two decades. Data were sourced from the World Bank database, which facilitates a comprehensive analysis of economic indicators such as political stability, exchange rates, and trade openness. The findings demonstrate a negative correlation between foreign divestment and economic growth, while financial development exhibits a positive relationship with foreign divestment. These findings highlight the importance of economic policies that promote financial development while alleviating factors that lead to foreign divestment. Data constraints in specific African countries, especially in areas with limited financial disclosure, can affect the generalisability of the findings. Furthermore, economic and political factors in African countries are prone to instability, which can impact long-term forecast precision.
References
Afolabi, L. O., & Bakar, N. A. A. (2016). Causal link between trade, political instability, FDI and economic growth–Nigeria evidence. Journal of Economics Library, 3(1), 100-110.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58(2), 277-297.
Arte, P., & Larimo, J. (2019). Taking stock of foreign divestment: Insights and recommendations from three decades of contemporary literature. International Business Review, 28(6), 101599.
Batsakis, G., Mohr, A., Konara, P., & Koritos, C. (2024). The effect of foreign divestment on subsequent firm performance: The moderating role of spatial and temporal dispersion of prior divestment experience. British Journal of Management, 35(4), 1763-1780.
Belderbos, R., & Zou, J. (2006). Foreign investment, divestment and relocation by Japanese electronics firms in East Asia. Asian Economic Journal, 20(1), 1-27.
Bitar, N., Hamadeh, M., & Khoueiri, R. (2020). Impact of political instability on foreign direct investment in Lebanon. Asian Social Science, 16(1), 1-41.
Boddewyn, J. J. (1983). Foreign direct divestment theory: is it the reverse of FDI theory?. Weltwirtschaftliches Archiv, (H. 2), 345-355.
Borga, M., Flores, P. I., & Sztajerowska, M. (2019). Drivers of divestment decisions of multinational enterprises-A cross-country firm-level perspective. OECD Working Papers on International Investment, (3), 1-56.
Buckley, P. J. (2018). Internalisation theory and outward direct investment by emerging market multinationals. Management International Review, 58(2), 195-224.
Cantah, G. W., Brafu-Insaidoo, G. W., Wiafe, E. A., & Adams, A. (2018). FDI and trade policy openness in Sub-Saharan Africa. Eastern Economic Journal, 44(1), 97-116.
Damaraju, N. L. (2008). Why and How Do Firms Divest? (Doctoral dissertation, The Ohio State University).
Dhanaraj, C., & Beamish, P. W. (2009). Institutional environment and subsidiary survival. Management International Review, 49(3), 291-312.
Djokoto, J. G. (2021). Drivers of agricultural foreign divestment. Studies in Agricultural Economics, 123(1), 43-51.
Djokoto, J. G., Gidiglo, F. K., Srofenyoh, F. Y., Agyei-Henaku, K. A. A., Prah, C. B., & Arthur, A. A. A. (2022). Agricultural development in the presence of foreign divestment: Policy options. Journal of Agriculture and Food Research, 7, 100250.
Djokoto, J. G., Hysa, E., & Mansi, E. (2024). Foreign divestment and domestic investment in Eastern European countries. Post-Communist Economies, 36(1), 90-104.
Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. In The eclectic paradigm: A framework for synthesizing and comparing theories of international business from different disciplines or perspectives (pp. 23-49). London: Palgrave Macmillan UK.
Edo, S., & Nnadozie, O. (2023). Macroeconomic and institutional conditions: the drivers behind divestment of FDI in Sub-Saharan Africa. Journal of Chinese Economic and Foreign Trade Studies, 16(1), 22-39.
Iqbal, A., Iqbal, J., Ojala, A., & Sousa, C. M. (2024). Foreign Divestment and Shareholders’ Value Creation: Role of Firm and Subsidiary Age. SSRN Journal, 1 (1), 1-38.
Jonsson, O. (2024). Foreign Direct Divestments (FDD) in Africa and Colonial Ties.
Ketkar, S. (2006). Multinational corporations' foreign subsidiary divestiture modes and sustainability of competitive advantage (Vol. 68, No. 01).
Khan, M.M., & Akbar, M.I. (2013). The Impact of Political Risk on Foreign Direct Investment. International Journal of Economics and Finance, 5(8), pp.147.
Kolev, K.D. (2016). To divest or not to divest: A meta‐analysis of the antecedents of corporate divestitures. British Journal of Management, 27(1), pp.179-196.
Maduane-Komape, R. (2025). The causal relationship between foreign divestment, economic growth and financial development in African countries. International Journal of Research in Business and Social Science (2147-4478), 14(4), pp.191-201.
Maduane-Komape, R., & Tshehla, M. (2024). Foreign divestment, financial development, and economic growth nexus in selected African countries: Autoregressive Distributed Lag (ARDL) Approach. International Journal of Research in Business and Social Science, 13(3), pp.233-247.
Magwedere, M.R. (2019). Financial intermediation and poverty nexus: evidence from selected developing countries. PhD UNISA thesis.
Matekenya, W., & Moyo, C. (2023). Foreign divestment, economic growth and development in South Africa: an empirical analysis. Journal of Chinese Economic and Foreign Trade Studies, 16(1), pp.4-21.
Mohr, P. (2015). “Economics for South African students.” Fifth edition. Van Schaik Publishers.
Moloi, V.M.M. (2023). The nexus between official development assistance, foreign direct investment and economic growth in selected African countries. PhD UNISA thesis.
Moloi, V., & Maduane-Komape, R. (2024). Foreign Divestment, Domestic Investment, and Economic Growth Relationship in Southern African Development Community During the COVID-19 Pandemic: Panel Ardl Approach. International Journal of Applied Research in Business and Management, 5(2).
Mughal, M.M., & Akram, M. (2011). Does market size affect FDI? The Case of Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 2(9), pp.237-247.
Musibau, H.O., Mahmood, S., & Hammed, A.Y. (2017). The impact of foreign capital inflows, infrastructure and role of institutions on economic growth: an error correction model. Academic Journal of Economic Studies, 3(4), pp.35-49.
OECD. (2019). “What is not ODA? Official Development Assistance (ODA)”, (April), pp. 1-8.
Omankhanlen, A.E. (2011). The Effect of Exchange Rate and Inflation on Foreign Direct Investment and Its Relationship with Economic Growth in Nigeria. Economics and Applied Informatics, (1), pp.5-16.
Pesaran, H.H., & Shin, Y. (1998). Generalised impulse response analysis in linear multivariate models. Economics letters, 58(1), pp.17-29.
Pusa, V. (2025). Divestment on International Markets: An Analysis of Reasons and Strategies of Divestments on International Markets. UNIVERSITY OF VAASA thesis.
Ralarala, O., & Makwala, M.H. (2022). Foreign direct divestment phenomenon in selected Sub-Saharan African countries. Macroeconomic Analysis for Economic Growth, pp.59-75.
Schmid, D. (2021). Foreign divestment by multinational corporations. Universität Freiburg Thesis.
Simionescu, M. (2016). The relation between economic growth and foreign direct investment during the economic crisis in the European Union. Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za ekonomsku teoriju i praksu, 34(1), pp.187-213.
Steenhuis, H.J., & Bruijn, E. (2009). International divestment: an overview and analysis. Academic of Management, pp.1- 36.
Udoh, E., & Egwaikhide, F.O. (2008). Exchange rate volatility, inflation uncertainty and foreign direct investment in Nigeria. Botswana Journal of Economics, 5(7), pp.14-31.
Vanninen, H., Keränen, J., & Kuivalainen, O. (2022). Becoming a small multinational enterprise: Four multinationalisation strategies for SMEs. International Business Review, 31(1), p.101917.
Wadhwa, K., & Reddy, S.S. (2011). Foreign direct investment into developing Asian countries: The role of market seeking, resource seeking and efficiency seeking factors. International Journal of Business and Management, 6(11), p.219.
Wehncke, F.C., Makoni, P.L., & Marozva, G. (2022). Nexus Between FDI, ODA and Economic Growth in Developing African Countries: A Systems Approach. Economic Research Guardian, 12(2).
Wernerfelt, B. (1984). A resource‐based view of the firm. Strategic management journal, 5(2), 171-180.
Yadav, A.R.T.I., & Iqbal, B. (2020). Foreign direct divestment: insight from the perspective of developed and developing economies. Asian Profile, 48(1), pp.39-45.
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Muzi Moloi, Refilwe Maduane-Komape (Author)
This work is licensed under a Creative Commons Attribution 4.0 International License.
