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Abstract

This study examines the mediating role of financial development in the relationship between foreign direct investment (FDI) and economic growth in low financial development (LFD) economies within the SADC region over the period 1991–2020. Using panel data techniques, including fixed effects estimation with Driscoll–Kraay standard errors and an instrumental variable approach, the analysis captures both the direct and indirect channels through which FDI influences economic growth. The findings indicate that, FDI exerts a positive and statistically significant direct effect on economic growth. More importantly, the results reveal a positive indirect (suppression) effect, whereby FDI mitigates the adverse impact of weak financial development on economic growth. This suggests that, even in financially underdeveloped contexts, FDI can partially compensate for domestic financial constraints, thereby enhancing economic growth. By highlighting this compensatory mechanism, the study extends the mediation literature beyond the conventional view that, financial development solely conditions the effectiveness of FDI. Instead, it shows that FDI can actively offset structural financial weaknesses, offering a nuanced understanding of the FDI and economic growth nexus mainly in LFD economies within SADC region. These findings underscore the importance of policies that not only attract FDI but also strengthen domestic financial development, particularly through improved regulation, expanded financial inclusion, and deeper integration with global financial markets to sustain economic growth.

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