Rethinking the FDI-growth nexus in Africa: evidence from a new analytical classification of African economies
Addis Yimer Gebregziabhear (Addis Ababa University)
Paper short abstract:
This study investigates the FDI-growth nexus in Africa for the period 1990-2016 using a new analytical classification of African countries as fragile, factor driven and investment driven economies. The results suggest that there is a variation in the FDI-growth relation across such classification.
Paper long abstract:
This paper investigates the FDI-growth nexus in Africa for the period 1990-2016 using a dynamically common correlated effect approach for an error-correction model. The study departs from earlier studies, which pool all different countries in one sample regardless of their structural or behavioral differences, by using an analytical classification of African countries as fragile, factor driven and investment driven economies. It also accounts for institutional and political factors and the problem of cross-sectional dependence that previous studies overlooked. The results suggest that there is a variation in the FDI-growth relation across the country classification used. While the long run growth effect of FDI is significant positive in investment and factor driven economies, its short run effect is insignificant in the latter. The effect of FDI on growth is insignificant in the fragile category both in the short run and long run. On the other hand, the indirect effect of FDI on growth through spillover effects by augmenting human capital is largely absent in the continent. It only is weakly significant in the long run coefficient of investment driven economies. While causality runs from FDI to growth in factor driven economies, bi-directional causality is detected in investment driven economies. No causality, in either direction, is found in the fragile states, however. The analysis underscores the need for emphasizing different policies in different countries or country groups.
- Transnational political economies of development