The Linkages Between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment in Sub‐Saharan Africa

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. While the recent increase in foreign direct investment (FDI) to African countries is a welcome development, the question remains as to the impact of these resource inflows on economic development. This study posits that a key channel of the impact of FDI on development is through its effects on domestic factor markets, especially domestic investment and employment. In this context, this study analyses the two-way linkages between FDI and domestic investment in Sub-Saharan Africa. The results suggest that firstly, FDI crowds in domestic investment, and secondly, countries will gain much from measures aimed at improving the domestic investment climate. Moreover, there are alternatives to resource endowments as a means of attracting foreign investment to non-resource rich countries.JEL Classification: E22, F21, F23, O16

Financial Reforms and Determinants of FDI: Evidence from Landlocked Countries in Sub-Saharan Africa

“…the stock of capital for developmental growth. This notion was to some extent in consistent with Ndikumana and Verick (2007) [29] who found out, using a fixed-effect estimator, that FDI is higher in countries where both private and public investment ratios are higher with a strong correlation between FDI and private investment.…”

Weakness in Investment Growth: Causes, Implications and Policy Responses

“…Empirical studies may be underestimating positive feedback loops from synergies between FDI and domestic investment, where FDI fosters domestic investment which, in turn, signals high returns to investment and encourages further FDI inflows (Ndikumana and Verick 2008).…”

Institutions, Foreign Direct Investment, and Domestic Investment: Crowding Out or Crowding In?

“…Other scholars find that FDI stimulates (or crowds in) private domestic investment (Al-Sadig, 2013;Ramirez, 2011;Ndikumana and Verick, 2008;Tang et al, 2008;de Mello, 1999;Bosworth and Collins, 1999;Borensztein et al, 1998). Several scholars find mixed evidence when using several lags for FDI or when splitting the country sample according to geographic region (Adams (2009); Apergis et al (2006); Agosin and Mayer (2000); Misun and Tomsik (2002); Agosin and Mayer (2000)), or find no effect of FDI on domestic investment (Lipsey (2000)).…”

“…Only some researchers in this field control for the relation between institutions and investment. For example, Ndikumana and Verick (2008) analyze correlations between FDI and democracy and autocracy on the basis of data from Marshall and Jaggers (2009). These authors find a significant relation between democracy and domestic investment, but, because the coefficient is relatively small, Ndikumana and Verick (2008, pp.…”