Domestic, Foreign Direct Investment and Economic Growth Nexus in Selected African Countries

Keywords: Investment, Foreign direct investment, Economic growth, Current Account, Panel data, Regional economics

Abstract

This paper assesses the impacts of investment on economic growth in Africa. The study used secondary data and selected thirty African countries based on data availability and covering the period of thirty-four years starting from 1980. The study was found to be imperative because extant studies are of mixed results, with the view that the negative relationship between investment and economic growth is peculiar with developing countries. Panel Estimated Generalised Least Squares (EGLS) with pooled, fixed and random effects estimations were carried out, but the results of the Pooled Panel EGLS with cross-section Seemingly Unrelated Regression (SUR) weight estimation were explained. The paper found out that domestic investment contributes 19.36 per cent to economic outputs in response to a percentage increment, while foreign direct investment (FDI) and current account balances contribute 13.21 and 3.61 per cent respectively to economic outputs when increased by a percentage. This paper concluded that the investment is very relevant to the economic growth in the continent, though its impact is only greater than that of FDI by approximately 6 percentage points, which is still very small. The paper recommends investment promotion strategies to enhance more local participation in investment processes and opportunities. Also, the principle of political stability and peaceful transition should be encouraged; and structural constraints should be effectively managed to enhance absorptive capacity and more foreign direct investment in the continent.

Keywords: Investment, Foreign direct investment, Economic growth, Current Account, Panel data, Regional economics

Jel Code: O16, F21, F43, F32, C33, R11

 

Author Biographies

Matthew Oladapo Gidigbi, Modibbo Adama University

An instructor with a keen interest in Financial and Monetary Economics. 

Manu Donga, Modibbo Adama University, Yola, Nigeria

An Associate Professor with an interest in Development Economics.

References

REFERENCES
Afawubo, K. & Mathey, S. (2017). The effectiveness of aid on savings and investment in Sub-Saharan Africa: do volatility and institutional quality matter? Applied Economics. DOI: 10.1080/00036846.2017.1302066
Agosin, M. R., & Machado, R. (2005). Foreign Investment in Developing Countries: Does It Crowd in Domestic Investment? Oxford Development Studies 33 (2): 149–62. doi:10.1080/13600810500137749
Arndt, H. W. (1991). Saving, investment and growth: Recent Asian Experience. BNL Quarterly Review (177), 151 - 163.
Asteriou, D., & Hall, S. G. (2007). Applied Econometrics: A modern approach (Revised Edition ed.). New York: Palgrave Macmillan.
Aurangzeb, , & UlHaq, A. (2012). Impact of investment activities on the economic growth of Pakistan. Business and Management Review, 2(1), 92 - 100.
Balasubramanyam, V. N., Salisu, M., & Sapsford, D. (1996). Foreign Direct Investment and Growth in EP and IS Countries. Economic Journal, 106(434): 92 - 105. DOI: 10.2307/2234933.
Basu, P., & Guariglia, A. (2007). Foreign Direct Investment, Inequality, and Growth. Journal of Macroeconomics, 29(4):824 - 39. DOI:10.1016/j.jmacro.2006.02.004.
Bisat, A., El-Erian, M. A., & Helbling, T. (1997). Growth, investment, and saving in the Arab Economies. International Monetary Fund. Washington D. C.: International Monetary Fund.
Borensztein, E., De Gregorio, J., & Lee, J.-W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics 45 (1): 115–35.
Bornschier, V., Chase-Dunn, C., & Rubinson, R. (1978). Cross-national Evidence of the Effects of Foreign Investment and Aid on Economic Growth and Inequality: A survey of Findings and a Reanalysis. American Journal of Sociology, 84(3): 651 - 683. DOI: 10.1086/226831.
Carbonell, J. B., & Werner, R. A. (2018). Does Foreign Direct Investment Generate Economic Growth? A New Empirical Approach Applied to Spain. Economic Geography, 94(4): 425 - 456. DOI: 10.1080/00130095.2017.1393312
De Mello, L. R. (1997). Foreign Direct Investment in Developing Countries and Growth: A Selective Survey. Journal of Development Studies, 34 (1): 1–34. doi:10.1080/00220389708422501.
Domar, E. D. (1946). Capital expansion, rate of growth, and employment. Econometrica, 14, 137-147.
Ejembi, S. (2015, January 16). Foreign investors withdraw N793bn from the stock market. Business. Lagos, Nigeria: The Punch Newspaper.
Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics International Edition (5th ed.). New York: McGraw-Hill Companies Inc.
Harrod, R. (1939). An essay in dynamic theory. Economic Journal, 49, 13 - 33.
Hermes, N., & Lensink, R. (2003). Foreign direct investment, financial development and economic growth. Journal of Development Studies 40 (1): 142–63. doi:10.1080/ 00220380412331293707.
Lequiller, F., & Blades, D. (2014). Understanding national accounts (Second ed.). Paris, France: OECD Publishing. doi:10.1787/9789264214637-en.
Levine, R., & Renelt, D. (1992). A Sensitivity Analysis of cross-country growth regressions. The American Economic Review 82(4):942-963.
Levin, A., Lin, C., & Chu, C. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108, 1 - 24.
Mankiw, N. G. (2009). Macroeconomics. New York: Worth Publishers.
Minney, T. (2015, March 13). African Capital Markets News. What are Africa's pension funds investing into? African Capital Markets News.
Ndikumana, L. (2014). Savings, capital flight, and African development. University of Massachusetts Amherst. Political Economy Research Institute.
Onafowara, O. A., & Owoye, O. &. (2011). The temporal relationship between saving and investment: Evidence from Advanced EU countries. International Journal of Business and Social Sciences, 2(2), 1-12.
Parkin, M., Powell, M., & Matthews, k. (2003). Economics (5th ed.). Harlow, Essex, England: Pearson Education Limited.
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61, 653 - 670.
Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20, 653 - 670.
Romer, P. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94, 1002-1037.
Sala-i-Martins, X., & Artadi, E. V. (2003). Economic growth and investment in the Arab World. Arab Competitiveness Report of the World Economic Forum.
Sarker, B., & Khan, F. (2020). Nexus between foreign direct investment and economic growth in Bangladesh: an augmented autoregressive distributed lag bounds testing approach. Financial Innovation, (2020) 6:1-18. https://doi.org/10.1186/s40864-019-0164-y
Sinn, S. (1991). Measuring international capital mobility: A critical assessment of the use of saving and investment correlation. The Kiel Institute of World Economics: D-2300 Kiel, Dusternbrooker Weg 120. Working Paper No. 458, pp. 1 - 29. Kiel Working Paper.
Solow, R. M. (1956, February). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65-94. Retrieved March 22, 2010, from http://www.jstor.org/stable/1884513.
Steinert, J. I., Zenker, J., Filipiak, U. Movsisyan, A., Cluver, L. D. & Shenderovich, Y. (2018). Do saving promotion interventions increase household savings, consumption, and investments in Sub-Saharan Africa? A systematic review and meta-analysis. World Development 104 (2018): 238-256.
Swan, T. W. 1956. Economic growth and capital accumulation. Economic Record 32 (2): 334–61. doi:10.1111/ecor.1956.32.issue-2.
Todaro, M. P., & Smith, S. C. (2011). Economic Development. Harlow-Essex, England: Pearson Education Limited.
United Nations. (2009). System of national accounts, 2008 (2008 SNA). New York: United Nations. Retrieved from http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf.
World Bank. (2015). World Development Indicators. Retrieved 2015, from The World Bank: http://www.data.worldbank.org.
Published
2021-10-11
Section
Business Administration and Business Economics