Abstract

This study seeks to examine the impact of financial development on investment and output in the manufacturing sector of Zimbabwe during the 1965-2003 period. The role of finance in the process of economic growth has been recognized more than a century ago and of late there has been a built up of literature on the same. In promoting investment and output growth financial systems play a number of functions, which include mobilization of savings, efficient allocation of resources, exerting corporate control and pooling of risk. The role of finance is more pronounced in sectors, which depend heavily on external finance than those, which depend on internal finance. The study used a Two Stage Least Squares approach to estimate the investment and output equation in order to circumvent the simultaneity bias problem. Cointegration and Error correction modeling was adopted to analyse the short and long run behaviour of investment and output in the manufacturing sector. The results of the two equations support the view that financial development positively impacts on investment and output in the manufacturing sector of Zimbabwe. Other major determinants of investment and output were found to be foreign currency earnings and inflation. The findings imply that policy makers should aim at promoting financial sector growth.

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School	: School of Law, Economics and Government
Issued Date	: 2007

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