INTRODUCTION
In the context of accelerating economic growth, reducing unemployment and
alleviating poverty, a broad majority of countries have observed the significance of
savings, which is the centrepiece of investment. The latter is the engine of economic
growth while the former id important to finance the engine of growth. Accommodating
to that, there is unity in the views of economic literature that countries that have low
saving rates struggle to finance investment. Sekantsi and Kalebe (2015) identify low
saving rates as a factor hindering growth in countries, especially least developed
countries (LCDs) like Lesotho. In developed countries, it is the opposite. Suto and
James (1999) find that the economic growth in the United States during the
antebellum period was derived from a prominent rise in domestic saving and
investments. This relationship is studied by the leaders of the Classical School.
Smith (1937) states that savings are eventually channelled into productive
investment, through the Say’s law, suggesting a positive relationship between the
two variables. This then creates an endogeneity between both the variables as an
increase in savings provides more funds to be loaned out to businesses to expand
thus increasing investments, conversely, when firms expand, they tend to create
employment that increase income levels leading to individuals saving more. Mankiw
(1998) highlights that savings supply the funds needed by firms to increase capital
goods through investment propelling economic growth. As a result, classical analysis
is concerned with savings being an obligatory condition for economic growth (Al-
Kasaben, 2022). Savings and investment are endogenous variables, and the
determinants of the variables are important to policymakers in a bid to achieve
sustainable economic growth.
Investment levels are significant to achieve economic growth, especially in
developing countries. Investment either come in domestic levels or in foreign direct
investment (FDI). According to Feldstein and Horioka (1980), there is strong
correlation between domestic savings and domestic investments, it suggests that
countries are the ones financing their own investments through savings. This
hypothesis posits that there is a low capital mobility between countries. The puzzle
has since come under scrutiny do the growing importance of foreign direct
investment (FDI) in countries. Schmidt (2010) posits that the relationship between
the two variables gives policymakers the incentive to affect the investment rates by
influencing saving rates. There is a clash in economic literature to the determinants
of savings. Keynes (1937) posits that savings are a function of income, while Smith
(1937) argues that savings are determined by interest rates. Even so, there is an
established outlook on economic growth prospect that savings are the mainstay of
investment and an increase in capital goods expands the economy (Barro, 1990)
and Lucas (1988), since then, the connection between savings and investment has
been investigated with new insight.
LITERATURE REVIEW
The publication of Feldstein and Horioka (1980) has brought a fresh aspect into the
relationship between investment and saving. The findings of the paper have been
subject to scrutiny with economic literature not being consistent with the findings of
the former. This leads the paper to the main objective of the study which is the
drivers of investments and savings in developed and developing countries. Hufner
and Koske (2010) examined the drivers of domestic saving in the G7 countries
positing that long-run interest rates and real-disposable income influence saving
rates in the 1970s. The paper finds that macroeconomic variables like interest rates
and income are significant for domestic savings. These findings by Hufner and
Koske (2010) provide a resemblance with the view of Keynes (1937) and Smith
(1937). The former maintains that an increase in disposable income leads to higher
savings, the behavioural aspect of economic agents save more after an increase in
income suggesting a positive relationship. Whereas Smith (1937) argues that high
interest rates incentive savings. These variables have a direct impact to economic
growth. Mody et al. (2012) observed that in the period between 2007-2009, a sharp
increase in domestic savings was motivated by the motive of precautionary savings.
The authors express a positive relationship between unemployment rates and
domestic savings because of the recession, households held back on the
consumption and accumulated savings. The effect on economic growth is
ambiguous. These results are consistent with the findings of Engen and Gruber
(2001). To accelerate economic growth, the precautionary savings motive is viewed
as a hinder as a positive relationship between the two variables reduces
consumption thus contracting GDP growth as investment did not meet the savings
equilibrium during the financial crisis. The drivers of saving rates in developing
countries are similar. Galt (2014) using time series data in the period between 1982-
2012 found that interest rates have a significant role in driving domestic savings in
Malta. The paper concluded that a one percent rise in real deposit rate led to an
increase in saving by rates between the interval of 0.8 and 1.1 percentages.
As stated before, investment levels play a significant role in achieving economic
growth, either in a form of domestic investment or foreign direct investment.
Asheghian (2004) posits that one of the dominant factors of economic growth in the
US includes domestic investment and foreign investment levels. Even so, the drivers
of investment differ from country to country. Michaelides et al. (2005) uses a multiple
linear regression between the periods 1960-1999 to examine the determinants of
investment levels in Greece. The study finds that there is a positive relationship
between investment and output growth followed by a negative relationship between
interest rates and investment. The results also show a dummy variable of oil crisis in
1992 impacting investment activity. These results are consistent with some of the
developing countries in Africa. Eshun et al. (2014) find similar results to the findings
of Machaelides et al. (2005) by examining the factors of private investment in Ghana
between 1970 to 2010. They observe a relationship of -5.2316 between interest
rates and investment and 4.2890 between output and investment. The negative
relationship illustrates the cost of borrowing being too expensive for firms to borrow
capital that leads to an increased capital formation given an increase in interest
rates. In South Africa, Ncanywa et al. (2017) finds a negative relationship between
investment and taxation rates. Koojaroenprasit (2013) investigated the determinants
of foreign direct investment in Australia from three countries between 1986-2011.
The study finds that a larger market size, greater research and development attract
investment form the USA, UK and Japan. Ucan (2016) investigated the determinants
of investment in the G7 countries between 1994 and 2010 with unity in the results
including external debt, interest rate, foreign trade and GDP growth. In contrast, the
paper found a positive relationship between interest rates on private investment.
REFERENCES
