Foreign direct investment in Sub-Saharan Africa and its contribution to economic growth
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Date
2001-06
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A.A.U
Abstract
The first objective of this paper is an ex-post approach that tests the pull-side determinants of
FDI inflows into SSA countries during the last two decades. To attain this objective, cross-section
multiple regression analysis is employed over three sub-periods (1980-84,1985-89
and 1995-1999), by treating five years average values of the both the dependent variable (per
capita FDI inflows) and the theoretically postulated explanatory variables. For this purpose,
thirty-four SSA countries are included in the sample of the study. From the estimated results,
the most important determinant variables are natural resource potential, infrastructure, real
GDP per capita (market size), exchange rate variability and the rate of inflation. The first
three variables are playing positive role in attracting FDL whereas the latter two are playing
a negative role. Lending interest rate, cost of labor and the degree of openness are the
factors that have negative relationship with FDI inflows in addition to the above variables
during the first period, while weak governance has negative impact for the second period. In
the third period, political instability, fiscal deficit, labor cost and corruption are factors that
negatively affect FDI inflows. Due to the multicollinearity problem, the alternative use of
human capital in place of income (during 1980-84 and 1995-99), and measure of the degree
of openness in place of the natural resource potential (during 1995-99), both explained the
FDI inflows positively. Interest rate was significantly determining FDI inflows into the SSA
countries only during the period of high level of joint venture FDJ Unlike the early periods of
1980-84, in the recent period of globalization, relatively more open countries attract higher
FDJ Under the hitherto circumstances, debt burden (unlike other developing regions) has
played little role in hampering FDI, and tax incentives have little impact in attracting FDI for
SSA countries.
The second objective is concerned with testing the impacts of FDI on the economic growth of
SSA countries directly, and through its impact on gross domestic saving, indirectly. To this
end, simultaneous equation model in panel data is estimated by treating growth of output and
gross domestic saving as endogenous variable and lagged value of FDI and other variables
as exogenous variables. Data from twelve SSA countries over the period of 1987-98 was used
for this test. The estimated result shows that FDI has negative but insignificant direct and
total effect on the growth of output of the sample SSA countries, but it has positive indirect
effect on the growth of output through domestic saving. As the assumption of efficient market
and perfect mobility of factors of production doesn't hold in for the SSA countries, the impact
of FDI on economic growth is unsatisfactory.
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Keywords
Foreign direct investment, Sub-Saharan Africa