Foreign direct investment and economic growth in Sub-Saharan Africa: A nonlinear analysis

Using the threshold regression model, we examine the effects of Foreign Direct Investment (FDI), and the mediating role of FDI absorptive capacity, on economic growth in Sub-Saharan Africa. We find that the threshold level of FDI inflows per person is approximately US$ 44.67 per annum. For FDI to have an appreciable impact on economic growth, countries must have minimum capacity to absorb the growth-enhancing benefits of FDI. For instance, the technology gap between the hosted foreign enterprises and domestic enterprises should be no less than 0.6904. Thus, achieving the FDI threshold level is a necessary, but not sufficient, condition for economic growth. Some countries use tax incentives to improve FDI inflows. We argue that such incentives may be counterproductive at low levels of FDI inflows: FDI coefficient estimates below the lowest threshold level are negative, implying that the higher costs of such incentives exceed the potential benefits availed by FDI’s direct contribution to economic output and spillovers.