4. Electronic Theses and Dissertations (ETDs) - Faculties submissions

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    Institutional quality, capital structure and financial performance: the case of listed firms in Africa
    (University of the Witwatersrand, Johannesburg, 2024) Celliers, Jacqueline; Chipeta, C.; Moletsane, M.
    This research report examines the relationship between institutional quality, capital structure and the financial performance of firms listed on selected African stock markets. Panel data estimation techniques are carried out on a set of 347 firms from five African countries over the period 2003 to 2022 using the two-step system Generalised Method of Moments. The results show that only the Economic Freedom Index and the significance of the stock market have a significant negative effect on total leverage. The Economic Freedom Index also has a negative significant impact on short-term debt, while the legal rights index has a significant positive effect. The other measures of institutional quality included in this study, such as rule of law, control of corruption and significance of the banking sector, have insignificant effects on total- and short-term debt, while all institutional quality indicators have insignificant effects on long-term leverage. The results also indicate that all three measures of leverage have a significant negative impact on firm performance, and that institutional quality may moderate the negative effects of total- and long-term debt on the financial performance of firms but doesn’t appear to play a part in mitigating the effects of short-term leverage. This study adds value to the literature by investigating the link between institutional quality, capital structure and firm performance in Africa, as most previous studies focus on developed countries. Furthermore, it also explores the role of institutional quality in influencing the relationship between leverage and financial performance, specifically relating to firms in Africa.
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    Financial inclusion, institutional quality, and poverty reduction in Africa
    (University of the Witwatersrand, Johannesburg, 2023) Nsiah, Anthony Yaw; Tweneboah, George
    Financial inclusion is seen as an enabler to growth in an economy, as such enhance poverty reduction, especially in developing regions like Africa. Poverty levels in Africa are still very high, especially with the advent of the Covid-19 pandemic, despite efforts of governments and development partners to address it. The extant literature has provided some information regarding the financial inclusion and poverty reduction nexus in the continent and elsewhere. However, the exact threshold level of inclusion at which poverty could be altered has not been thoroughly explored. Also, the critical role institutions play in transferring the benefits of financial services to households and firms towards poverty reduction has not been extensively interrogated. This thesis therefore consists of three separate empirical studies which all intend to fill the knowledge gap, using advanced econometric methodologies. For the first essay, we examined the determinants of financial inclusion in Africa, considering demand, supply as well as infrastructure side factors. Despite the importance of financial inclusion, many factors play a role in one’s decision to get involved in the financial sector. Using the GMM technique, the study revealed that GNI per capita (demand-side factor), Domestic credit to private sector (Supply-side factor) and institution quality (infrastructure-side factor) were significantly identified to be determinants of financial inclusion in Africa. It was further revealed that GNI per capita, Money supply and Institutional quality contribute to the minimization of barriers to financial inclusion. The second essay sought to estimate the threshold level at which financial inclusion, aided by strong institutions, will lead to poverty reduction in Africa. Financial inclusion has been identified as an important concept in fighting poverty due to its ability to increase income level of households. Using the Hansen’s threshold estimation method, the study found double threshold values at which financial inclusion would increase household consumption expenditure, leading to poverty reduction. The study also established a certain threshold level beyond which, financial barriers will have a negative iv impact on consumption which has the tendency to scare households from participating in the financial sector. The results further indicated that dependency ratio, gross national income, interest rate, inflation, education, and government expenditure contribute significantly to reducing barriers to reduce poverty. Institutional quality was also found to significantly moderate the financial inclusion and poverty reduction relationship. The last but not the least essay investigated the nature of the relationship between financial inclusion, financial stability, and poverty reduction in Africa. Financial inclusion plays an important role in enhancing stability of the financial system. It has however been argued that some level of financial inclusion has the tendency to destabilize the financial system, thwarting poverty reduction efforts. Using the panel Autoregressive Distributive Lag (ARDL) model, the study found that financial inclusion is positively related to financial stability in both short and long-run, with education, GNI per capita and domestic credit to private sector positively related to financial stability and trade openness negatively related to same, in the long-run. The study further established that financial stability is positively related to consumption as such leads to poverty reduction with trade openness, government expenditure, GNI per capita, education, domestic credit to private sector and institutional quality been positively related to household consumption, as such its effects lead to poverty reduction. This indicates that financial stability plays a complementary role in the financial inclusion drive to fight poverty in Africa. It is recommended that development partners, central banks and governments in the region should consciously implement policies that are aimed at promoting financial inclusion through the strengthening of institution, due to its ability to end poverty as well as take pragmatic measures to minimize barriers to financial inclusion. Despite the financial inclusion drive, regulations must not be taking for granted in order not to compromise stability of the financial system for the joint benefit in the fight against poverty as well as ensure financial stability
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    Impact analysis of institutional quality on foreign direct investment inflows into the Southern African Development Community (SADC) region
    (University of the Witwatersrand, Johannesburg, 2022) Malindini, Kholiswa; Pillay, Pundy
    The quality of governance has increasingly become a significant determinant of foreign direct investment inflows in recipient countries. Although extensive research has been conducted internationally to examine the role of institutional quality on foreign direct investment inflows, this concept has not been thoroughly interrogated in the Southern African Development Community (SADC) context. The region is poverty-stricken, unemployment rates are skyrocketing, economic growth is deteriorating, and the region only accounts for only one percent of global FDI. Thus, this study sought to examine three main objectives critically: first, the effect of institutional quality on foreign direct investment inflows into the SADC region; second, the influence of the financial development on the FDI-institutional quality nexus and thirdly, to assess whether countries’ income levels matter for attracting FDI inflows. FDI as a percentage of GDP was measured as a dependent variable, while institutional quality, financial development, natural resource availability, and GDP growth were the main explanatory variables. The study controlled for inflation rates, trade openness, and trade policy. An interaction term was generated to evaluate the effect of financial development on the FDI-institutional quality nexus in the SADC region. In order to achieve the research objectives, a mixed-methods approach was adopted, and a convergence research design was applied. Secondary data for other macroeconomic variables were drawn from the World Bank Development Indicators. In contrast, data for financial development were drawn from the International Monetary Fund’s Financial Development Index database, and data for governance indicators were drawn from the Worldwide Governance Indicators’ database. Primary data was collected through semi-structured interviews and survey questionnaires. Econometric models were developed to analyse panel data from 2011 – 2018 for 15 SADC member states to achieve the set objectives quantitatively. Specifically, the study adopted the Generalised System Methods of Moments (GMM) as the appropriate and efficient estimation technique for the analysis. Using a Pillar Integration Process, the data were integrated. The overall findings suggested that, while GDP growth, trade openness, and natural resources positively influence FDI inflows into the region and are statistically significant, institutional quality, inflation, trade policy and financial development are negatively and statistically significant coefficients towards FDI. The results revealed that a poor regulatory environment, the rule of law, and weak accountability are the main disincentives to improved quality of governance. The overall results indicated that weak institutional quality is still a significant challenge as far as inward FDI attraction is concerned; the lack of an enforcement mechanism directly impacts foreign investor property rights protection and eventually deters foreign investment inflows. Also, the unstable political framework that fails to sufficiently support economic institutions and ensure certainty, and the lack of political will, particularly by heads of government to implement and prioritize regional objectives over national interests, is a significant problem and stifles progress towards more profound integration. It also transpired that the financial markets and institutions within the region are not efficiently developed and are still fragmented, and this is attributed to macroeconomic instability and weak macroeconomic convergence. The findings also revealed that the countries’ income levels do not matter as far as FDI attraction is concerned. Based on these results, it may be necessary for SADC member states to adopt an institutional framework that promotes collaboration in the region and ensures effective and efficient implementation of the potential protocols. Given the dominance of national sovereignty over regional objectives, it may be worth examining the regimes that govern the member states; based on the view that sometimes non-compliance by member states emanates from the regime, which may sometimes not support regionalism. Convergent bilateral and multilateral arrangements are necessary for the region. The region needs to raise its export competitiveness by attracting domestic and foreign investments, and a rigorous trade integration process is a prerequisite. Policymakers in the region should focus on working together with institutions to promote development in the banking sector. Further, given the adverse effects of financial development on FDI inflows due to rising domestic credit by the banking sector, efforts should be made to maintain domestic credit levels to allow room for more FD
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    Essays on private capital flows and real sector growth in Africa
    (2021) Asamoah, Michael Effah
    Globally, countries continue to implement policies aimed at the attraction and retention of capital flows due to its perceived significant effect on economic growth and development. The benefits of capital flows are touted as being able to drive down domestic interest rates, smooth consumption, transfer of technology and improve the functioning of the financial sector. In as much as there is a copious body of literature on capital flows and economic growth, there remain essential areas that the literature has been silent. Among these are capital flows and real sector growth in the light of the allocation puzzle; the real sector amid financial sector development and institutions; private capital flows-macroeconomic volatility-financial development connections, and thresholds in the capital flows-real sector growth dynamics. Filling these gaps will provide the needed knowledge and policy directions on how countries that are known to depend on capital flows can harness these flows for growth and development, especially at the level of the real sector. Using robust econometric procedures, this study examined four thematic areas of capital flows in Africa. The first essay investigated the evidence and/or otherwise of an allocation puzzle and bi-directional relationship between private capital flows and real sector growth. The study covered 42 Sub-Saharan African (SSA) countries between 1980 and 2017. We used growth in manufacturing, industry, agriculture, and services to capture the real sector and proxied private capital flows by foreign direct investment, portfolio equity flows, and private non-guaranteed debt. We employed the two-step dynamic systems GMM model to establish our empirical relationships. We found no evidence in support of the allocation puzzle, which suggests that SSA countries with relatively high growth in the real sector will attract more private capital. However, at a decomposed level, we established a bi-directional relationship of a positive association between debt flows and growth in agriculture and services, with no evidence of an allocation puzzle. Though we found a bi-directional association between debt and industrial growth, the association was detrimental in both directions. Also, the study established a two-way inverse reverse effect between equity flows and manufacturing growth. Finally, while the impact of foreign direct investment on the real sector is positive at the disaggregated level, there is a positive bi-directional effect between foreign direct investment and growths in manufacturing, industry, and service value additions. The study provides a strong foundation for an alternative source of financing, especially for the growth of the service and agriculture sectors regarding debt and equity, from the reliance on the traditional FDI. The findings also indicate parallel reactions between real sector growth and private capital in SSA. The second essay had two separate objectives fused into one. The first part examined the brinks of financial development at which private capital to Africa enhances growth at the level of the real sector. We deployed a newly developed financial development dataset to moderate the association between private capital and the real sector, and the Lewbel instrumental variable two-step GMM estimator (IV –GMM), with Kleibergen-Paap robust standard errors and orthogonal statistics in establishing our empirical relationships over the period 1990 to 2017, for a sample of thirty (30) countries in Africa. Initial estimations at the overall level of the real sector, manufacturing, and industry show that FDI has no growth effects and even worsens the growth of the agriculture sector. Financial development stifles growth. On decomposing the real sector, we found the interaction between FDI and financial development to enhance the growth of the real sector and its components at face value. However, our marginal effect analysis shows that the growth impact of FDI on the overall real sector, industry, and service sector growth starts at the threshold level of the 25th percentile of financial development, while the growth impact on manufacturing is only evident at the 90thpercentile of financial development. Finally, although financial sector growth aids foreign direct investment in enhancing the growth of the agriculture sector, it cannot wholly eradicate the initial adverse impact from FDI. We further found that portfolio equity has no growth impact on Africa’s real sector, while debt flows harm the overall real sector, manufacturing, and industrial growth, but no impact on agriculture and services’ growth. We found that financial development reinforces the conservative view that capital flows enhance economic growth, but the reinforcement depends on the type of sector, either debt or equity, and the percentile levels of financial development. A similar objective was to analyze the interconnections between private capital flows, the quality of institutions, and the growth of the real sector in Africa. The study covers thirty (30) African countries. Our empirical analysis, with a panel data between 1990 and 2017, indicates that private capital flows (FDI, private debt, and equity) have no direct impact on the growth of the real sector. A decomposition divulges that FDI has no impact on manufacturing and detrimental to industrial and agriculture sectors. Portfolio equity is injurious to growth in services and unresponsive to the growth of all other sectors. Private debt was also insensitive to the growth in agriculture and services, and even damaging to manufacturing and industrial growth. Initial assessments show that countries with robust institutional frameworks can benefit significantly from capital flows, as we found institutions do moderate the positive impact of capital flows on the growth of the real sector, starting from the 25th percentile of institutions. Our marginal analysis confirms that the impact of private capital on real sector components is dependent on the type of capital, the sector, and the percentile level on institutions, in some cases, as far as the 90th percentile. Our results show that for policy implementation, it is not a case of one cup fits all, but sector-specific capital flow institutional policies should be the way forward. The orthodox view is that uncertainty is a deterrent to investment, and by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, private capital flows and a newly developed indicator of financial development, the third chapter of the thesis examined the impact of exchange rate uncertainty on private capital flows, and whether financial development matters in such association. Specifically, the study sought to answer four questions: Is the exchange rate uncertainty –capital flows nexus strictly monotonic? Does exchange rate volatility deter capital flows? Can financial development mitigate the adverse effect of economic uncertainty on capital flows? At what threshold point does financial development jettison the negative impact? The study covers 40 countries over the period 1990 –2017. We establish our empirical relation with a system general method of moments (GMM) two-step robust estimator with orthogonal deviations. We found evidence in support of anon-linear U-shaped relationship between uncertainty and capital flows, and that the impact of uncertainty on capital flows depends on varying levels of uncertainty. We also document that uncertainty deters all forms of capital flows, and that countries with a well-functioning financial system can transform the adverse impact of volatility on capital flows. However, our marginal analysis shows that curbing the adverse effect of volatility on private capital depends on the type of capital flow, the indicator as well as the percentile level on financial sector development, in some cases as far as to the highest percentile. We further established that with the current state of the financial sector, financial institutions’ development offers the quickest route to curtailing the adverse impact of volatility on capital flows, as it has a lower threshold value or critical point compared with financial markets’ development. In the final essay, we investigated the possibilities of non-monotonic or nonlinearities in the capital flows - economic growth dynamics, as some studies posit that the effect of capital flows on economic growth changes course after attaining a certain threshold level, either based on the levels of capital flow itself or some mediating variables. We proxied capital flows by foreign direct investment (FDI) inflows and growth by real sector components. With data from 1990 to 2018, for a sample 36 African countries, the study employed Seo and Shin (2016) dynamic panels threshold effect with endogeneity as well as Seo et al. (2019) estimation of dynamic panel threshold model using Stata to achieve the study’s objectives. In the first part of the analysis, we employed three indicators of human capital development as threshold variables, and FDI flows as the regime dependent variables. These are the mean years of schooling, gross national secondary school enrolment, and primary school pupil to teacher ratio. In the subsequent analysis, we deployed FDI as both the threshold and regime dependent variable. The study found significant thresholds in the capital flows -real sector growth relationship as mediated by human capital and foreign direct investment. The significance impact of foreign direct impact on real sector happens at both the lower and upper levels of the mediating variable but the component of real sector matters. We established that in most cases, the impact of FDI on the growth of the real sector is harmful in the lower regime and beneficial in the upper regime of human capital for both manufacturing and services sectors, and vice versa for both agriculture and industrial sectors. The results indicate that increasing levels of human capital development and FDI inflows are necessary for the growth impact of FDI on Africa’s real sector, but not under all sectors as he results are dependent on the varying threshold variables of both human capital and foreign direct investment