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