Impact of Foreign Direct Investment on Trade of African Countries

Abstract

It is not uncommon to see African countries struggling to address their foreign currency shortage. FDI is presumed to play a role in addressing this problem. With this in mind, the main objective of the study is to determine the relationship between FDI and trade balance (import and export) of African countries for the period 1980 to 2007. Due to data heterogeneity, non-continuity and because the Hausman test favours it over the Random Effect technique, the Least Square Dummy Variable (LSDV) regression method is used. The elasticities of both export and import are positive and significant with larger elasticities noted for exports relative to imports. This implies that Multi-National Enterprises (MNEs) in SSA are not just export-oriented but also import dependent. To save on the scarce foreign reserve, investment policy makers in those countries should direct MNEs towards those areas involving further export promotion, import substitution and local factor intensive investments.

Does Foreign Direct Investment Promote Exports? Evidence from African Countries

“…Hailu () analyses the relationship between FDI and trade balance (imports vs. exports) of 16 sub‐Saharan African (SSA) countries for the period 1980–2007. The paper finds that the elasticities of both exports and imports with respect to FDI are positive and significant with larger elasticities observed for exports than for imports.…”

“…The existing empirical literature on the link between FDI and exports shows that in the case of Africa, not only have very few papers examined the effect of FDI on exports, but even for the existing studies, it is difficult to generalise the findings, since the studies were carried out either at country level (the case of Cameroon and Morocco), firm level (the case of Ghana) or with a limited number of countries (e.g. the paper by Hailu, , which covers only 16 out of 48 SSA countries).…”

The Impact of Innovation and Foreign Direct Investment (Fdi) and Its Interaction to Export Value of High-Technology Products of Asian-10

“…At the beginning of the FDI phase, imports of equipment, machinery, provision of facilities and expertise, all contribute to increased imports. This is due to the high tendency of FDI companies to import capital goods, intermediate goods and services that are not available in the host region (Hailu, 2010).…”

The role of institutional and regulatory adjustments on Foreign Direct Investment in the European Union area

“…Market size has been the most widely accepted significant determinant of FDI inflow with a positive impact as it attracts foreign investing firms that are interested either in capturing a domestic market share or in countries with higher purchasing power (Arbatli, ; Bevan & Estrin, ; Bhavan, Xu, & Zhong, ; Hailu, ; Jadhav, ; Krifa‐Schneider & Matei, ; Leitao & Faustino, ). Market size is usually represented by the per capita Gross Domestic Product.…”

“…Market size has been the most widely accepted significant determinant of FDI inflow with a positive impact as it attracts foreign investing firms that are interested either in capturing a domestic market share or in countries with higher purchasing power (Arbatli, 2011;Bevan & Estrin, 2004;Bhavan, Xu, & Zhong, 2011;Hailu, 2010;Jadhav, 2012;Krifa-Schneider & Matei, 2010;Leitao & Faustino, 2010 An open economy to trade is expected to be more attractive to FDI inflows (Jadhav, 2012;Krifa-Schneider & Matei, 2010;Masron & Abdullah, 2010) especially when foreign investment leads to the production of exportable goods and services (Jun & Singh, 1995). Trade openness was found to be statistically insignificant or one of the economically less important determinants of FDI inflow usually in studies of developing countries (Vijayakumar, Sridharan, & Rao, 2010;Walsh & Yu, 2010).…”