Impact of Financial Market Stability, National Security, and FDI on Economic Growth in Sub-Saharan Africa: Does Institutional Quality Matter?

Abstract

This study investigates the effects of financial market instability, national security, and foreign direct investment (FDI) on economic growth in Sub-Saharan Africa from 1991 to 2023, while examining the moderating role of institutional quality. The study employs a panel autoregressive distributed lag (ARDL) model as the baseline estimator, complemented by fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) for robustness analysis. The results reveal that financial market instability constrains economic growth primarily through sovereign bond market instability and vulnerability to earnings manipulation, whereas stock price volatility exerts no significant long run effect. Improved peace conditions and domestic military expenditure promote growth, while terrorism undermines economic performance. Government effectiveness and control of corruption enhance growth, whereas foreign direct investment exerts a negative long-run effect in the absence of supportive domestic conditions. The interaction results show that institutional quality significantly conditions the effects of financial market conditions, national security, and foreign investment on growth. Stronger institutions reduce the adverse consequences of financial and security-related disturbances and improve the growth-enhancing capacity of foreign capital. The FMOLS and DOLS estimates largely confirm the baseline results. The study concludes that institutional quality constitutes a critical transmission mechanism through which financial stability, national security, and foreign investment influence long run economic growth in Sub-Saharan Africa.