The Effect of Foreign Direct Investment on Economic Growth in Sub-Saharan Africa: Moderation Analysis

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2024-06-17

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A.A.U

Abstract

Considering the empirical and literature gaps as well as ongoing debates and dilemmas about the effect of Foreign Direct Investment (FDI) on economic growth in sub Saharan African countries, the objective of this study is to examine the effect of foreign direct investment (FDI) on economic growth in sub-Saharan African countries and the moderating roles of macroeconomic stability, infrastructure development, and trade openness on this relationship. Using panel data for 18 sub-Saharan African countries from 2000 to 2022, the study employs System GMM (Generalized Method of Moments) and structural equation modeling techniques to analyze the dynamic relationships. The findings indicate that Foreign Direct Investment has a positive and significant effect on economic growth in the region. However, the effectiveness of FDI in promoting growth is found to be contingent on the prevailing macroeconomic conditions, level of infrastructure development, and degree of trade openness. Specifically, the results show that macroeconomic stability and infrastructure development positively moderate the FDI-growth nexus, enhancing the growth-inducing impact of FDI. Conversely, trade openness is found to negatively moderate this relationship, suggesting that excessive trade liberalization may limit the growth benefits of FDI inflows. These findings underscore the importance of establishing conducive macroeconomic environment, investing in infrastructure, and carefully managing trade policies to maximize the growth-enhancing effects of foreign direct investment in sub-Saharan Africa. The study provides valuable policy implications for governments and policymakers in the region aimed at leveraging FDI to foster sustainable economic development. Key Words: Foreign Direct Investment (FDI), Economic Growth, Sub-Saharan Africa, Macroeconomic Stability Infrastructure Development, Trade Openness

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