Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions

Abstract

This article examines the relationship among foreign direct investment ( FDI ), institutions and economic growth in sub-Saharan Africa in different country environs. We employ a two-step generalized methods of moments estimator with Weidmeijer corrected standard errors and orthogonal deviations to examine the empirical relations. In the full sample, we do not fi nd evidence that FDI promotes growth. We also do not fi nd a signifi cant relationship between institutions and economic growth. Finally, we do not fi nd convincing evidence that institutions alter favorably the effect of FDI on economic growth. In the subsample that excludes countries with developed fi nancial markets, again we do not fi nd a signifi cant relation between FDI and economic growth. However, we fi nd evidence suggesting that institutions play a direct role in spurring economic growth. Further, the quality of institutions seems to alter favorably the relationship between FDI and economic growth. Finally, in the sample that excludes countries with abundant natural resources, we fi nd a direct and positive relationship between FDI and economic FEATURE ARTICLE 480 FEATURE ARTICLE growth. We also fi nd a direct relationship between institutions and economic growth. The growthenhancing effects of FDI , however, seem to reduce as the quality of institutions improves. The major implication from our study is that countries should take into consideration their own realities when they fashion policies to benefi t from FDI in terms of achieving better growth outcomes.

The economic growth and foreign direct investment nexus: Does democracy matter? Evidence from African countries

“…The SGMM estimator is suitable and particularly relevant for this study for several reasons. First, as pointed out by Blundell and Bond (), the SGMM estimator provides an improvement over the DGMM estimator when the dependent variable is highly persistent with the autoregressive term, close to unity and the number of time periods is small (Agbloyor et al, ; Roodman, ). This might fit our study more as our time period is short (26 years) and we have 53 African countries.…”

“…The authors argued that these findings reflect differences in the institutional and policymaking environments between these sets of countries, with the accession economies benefiting from implicit or explicit EU guarantees of democracy and macroeconomic stability. Recently, Agbloyor, Gyeke‐Dako, Kuipo, & Abor () tested the hypothesis that the relationship among FDI, institutional quality, and economic growth may differ based on country characteristics such as the level of financial development and natural resource endowment. Using data for SSA, the results show that the quality of institutions favorably alters the effect of FDI on economic growth countries that do not have developed financial markets.…”

“…The openness variable has been widely used in the growth literature (see Agbloyor et al, ). We expect a positive relationship between trade openness and economic growth.…”

Investment and Growth Amidst Widening Government Debt: “The Ghanaian Story”

“…After controlling for national gross savings (as a share of GDP); population growth; average number of years of secondary education; trade openness; inflation; age dependency ratio; banking crisis dummy; and the ratio of liquid liabilities to GDP they report negative effect of public debt on economic growth. Moreover, the empirical investigation of Agbloyor et al (2016) on a related subject fail to reject the Panizza & Presbitero (2014) findings that government debts have a negative impact on economic growth. Similarly, Zouhaier and Fatma (2014 p. 445) using Arellano-Bond dynamic panel data estimator explore the effect of debt on economic growth of 19 developing countries over the period 1990-2011.…”

“…This generalization has resulted in ideological differences among various economists on the effect of increasing capital flows on macroeconomic indicators. Whereas extant empirical studies (Eberhardt & Presbitero, 2015;Gui-Diby, 2014;Sulaiman & Azeez, 2012;Sedik & Sun, 2012;Mody & Murshid, 2011;Aizenman & Spiegel, 2006;Sachs et al, 2004) support this assertion; other evidences especially from Sub-Saharan Africa (SSA) suggest contrasting results in the absence of some mitigating factors (Mensah, Bokpin, & Boachie-Yiadom, 2018;Agbloyor, Gyeke-Darko, Kuipo, & Abor, 2016;Zouhaier & Fatma, 2014;Panizza & Presbitero, 2014;DiPeitro & Anoruo, 2012;Presbitero, 2008).…”