The Impact of Foreign Direct Investment on Export Diversification: A Panel Study on Common Market for Eastern and Southern Africa

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Addis Ababa University


The main objective of this paper is to investigate the impact FDI has on export diversification in the Common Market for Eastern and Southern Africa (COMESA). The paper employs two measures for the two margins of diversification. Diversification at the intensive margin is measured by Herfindahl index. Diversification at the extensive margin is measured by a count indicator of new export lines. Panel data econometric methods are used; specifically a random effects regression is used as per the choice of a Hausman test. Since linear models are inappropriate for count variables, the paper used a Poisson regression method to investigate the impact of FDI on new export lines. The findings suggest that FDI does not help COMESA countries diversify at the intensive margin but has a significant positive impact on diversification at the extensive margin. The results can be explained as follows: Even though FDI helps COMESA countries export new products, these products might still be a very small proportion of the export earnings. The Herfindahl index is sensitive to changes in shares of export earnings but it might not pick up small changes in shares. This is because exporting new products doesn’t necessarily mean that the export shares of the major traditional export items decline significantly. It is concluded that COMESA countries should continue to pursue FDI favorable policies like tax incentives, administrative support, customs incentives etc. since FDI expands their export basket.



Investment on Export Diversification