The Impact of External Debt on Foreign Direct Investment- Growth Nexus: The Case of Sub Saharan Africa
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Date
2022-07
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Addis Ababa University
Abstract
Many developing countries now in the world gain an advantage and has been benefited from the world FDI so as to promote their economic growth. While, other developing countries like Sub Sahara African countries are set to be struggled with external debt crisis still now. Empirical studies on external debt and FDI has been done so far. However, the issue is still controversial and inconclusive, studied only at country as well as sub region level and previous studies did not take in to account that, which (debt or FDI) greatly affected economic growth in the region and also differ in the methodology they applied. Therefore, this study examines the impact of external debt on the inflow of foreign direct investment to SSA region and to identify the more impactful variable (external debt and FDI) on economic growth nexus using annual secondary panel data approach extracted from the WDI database from 2001-2020. The data were analyzed using descriptive statistics, as well as dynamic panel models of one step system-GMM approach. The validity of results was confirmed by the Arellano-Bond test for autocorrelation in the disturbance term and the Hansen and Sargan tests for the validity of instrumental variables. The results of the one step system GMM suggest that external debt exerts a negative impact on both FDI inflow and economic growth of SSA countries. The lagged FDI, external debt, trade openness, gross fixed capital formation, and exchange rate are factors significantly affecting the inflow of FDI. Economic growth in the region also significantly influenced by; previous year growth, external debt, infrastructure, and population growth. The study concludes and recommends that SSA countries should reduce their external borrowing utmost not beyond their maximum threshold level and thus should adopt and implement policies that favors in improving trade openness, rising domestic saving, attracting FDI inflow in order to finance their capital budget deficit and focusing on expanding infrastructure that will enhance productivity so as to improve economic growth.
Keywords: FDI, External Debt, Economic Growth, System-GMM, Sub Saharan Africa.