IDEAS home Printed from https://ideas.repec.org/a/spr/soinre/v122y2015i1p45-64.html
   My bibliography  Save this article

Foreign Direct Investment and Economic Growth: The Case of Developing African Economies

Author

Listed:
  • Mebratu Seyoum
  • Renshui Wu
  • Jihong Lin

Abstract

This paper uses annual balanced panel data to examine the Granger causal link between foreign direct investment (FDI) and economic growth (measured by real GDP growth) for 23 African countries covering the period from 1970 to 2011. Using recently developed panel econometric techniques the present paper takes into account non-stationary and cross-section dependency in the dataset when analyzing the growth-FDI nexus. The empirical results indicate two-way Granger causality link between FDI and economic growth. Furthermore, we show that this causal link is not homogeneous among individual countries in our sample. More specifically, we observe unidirectional causality from FDI to GDP growth in Egypt, Gabon, and Mauritania, and from GDP growth to FDI in Côte d’Ivoire, Kenya, South Africa and Zambia. Our main finding remains robust to estimation between FDI as a fraction of gross capital formation and real GDP growth. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Mebratu Seyoum & Renshui Wu & Jihong Lin, 2015. "Foreign Direct Investment and Economic Growth: The Case of Developing African Economies," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 122(1), pages 45-64, May.
    • Handle: RePEc:spr:soinre:v:122:y:2015:i:1:p:45-64
    DOI: 10.1007/s11205-014-0679-6
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11205-014-0679-6
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11205-014-0679-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Jong Il Choe, 2003. "Do Foreign Direct Investment and Gross Domestic Investment Promote Economic Growth?," Review of Development Economics, Wiley Blackwell, vol. 7(1), pages 44-57, February.
    3. Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
    4. Henrik Hansen & John Rand, 2006. "On the Causal Links Between FDI and Growth in Developing Countries," The World Economy, Wiley Blackwell, vol. 29(1), pages 21-41, January.
    5. Bengoa, Marta & Sanchez-Robles, Blanca, 2003. "Foreign direct investment, economic freedom and growth: new evidence from Latin America," European Journal of Political Economy, Elsevier, vol. 19(3), pages 529-545, September.
    6. Frimpong, Joseph Magnus & Oteng-Abayie, Eric Fosu, 2006. "Bivariate causality analysis between FDI inflows and economic growth in Ghana," MPRA Paper 351, University Library of Munich, Germany, revised 09 Oct 2006.
    7. de Mello, Luiz R, Jr, 1999. "Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 133-151, January.
    8. Ronald Findlay, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(1), pages 1-16.
    9. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
    10. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    11. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    12. Wang, Jian-Ye, 1990. "Growth, technology transfer, and the long-run theory of international capital movements," Journal of International Economics, Elsevier, vol. 29(3-4), pages 255-271, November.
    13. Adams, Samuel, 2009. "Foreign Direct investment, domestic investment, and economic growth in Sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 31(6), pages 939-949, November.
    14. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
    15. M. Hashem Pesaran, 2021. "General diagnostic tests for cross-sectional dependence in panels," Empirical Economics, Springer, vol. 60(1), pages 13-50, January.
    16. Glass, Amy Jocelyn & Saggi, Kamal, 2002. "Intellectual property rights and foreign direct investment," Journal of International Economics, Elsevier, vol. 56(2), pages 387-410, March.
    17. Katerina Lyroudi & John Papanastasiou & Athanasios Vamvakidis, 2004. "Foreign Direct Investment And Economic Growth In Transition Economies," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 2(1), pages 97-110.
    18. Zhang , Kevin Honglin, 2000. "Human Capital, Country Size, and North-South Manufacturing Multinational Enterprises," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 53(2), pages 237-260.
    19. Moran, Theodore H., 1978. "Multinational corporations and dependency: a dialogue for dependentistas and non-dependentistas," International Organization, Cambridge University Press, vol. 32(1), pages 79-100, January.
    20. Fedderke, J.W. & Romm, A.T., 2006. "Growth impact and determinants of foreign direct investment into South Africa, 1956-2003," Economic Modelling, Elsevier, vol. 23(5), pages 738-760, September.
    21. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    22. Emirmahmutoglu, Furkan & Kose, Nezir, 2011. "Testing for Granger causality in heterogeneous mixed panels," Economic Modelling, Elsevier, vol. 28(3), pages 870-876, May.
    23. Uwe Walz, 1997. "Innovation, Foreign Direct Investment and Growth," Economica, London School of Economics and Political Science, vol. 64(253), pages 63-79, February.
    24. KH Zhang, 2001. "Does Foreign Direct Investment Promote Economic Growth? Evidence From East Asia And Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 19(2), pages 175-185, April.
    25. Basu Sharma & Joe Abekah, 2008. "Foreign Direct Investment and Economic Growth of Africa," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(1), pages 117-118, March.
    26. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    27. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    28. J Benson Durham, "undated". "Time-Series Econometrics of the Real and Financial Effects of Capital Flows: Selected Cases in Africa and Southern Asia," QEH Working Papers qehwps56, Queen Elizabeth House, University of Oxford.
    29. Das, Sanghamitra, 1987. "Externalities, and technology transfer through multinational corporations A theoretical analysis," Journal of International Economics, Elsevier, vol. 22(1-2), pages 171-182, February.
    30. Ndikumana, Leonce & Verick, Sher, 2008. "The Linkages between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment in Sub-Saharan Africa," IZA Discussion Papers 3296, Institute of Labor Economics (IZA).
    31. Léonce Ndikumana & Sher Verick, 2008. "The Linkages Between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment in Sub-Saharan Africa," Development Policy Review, Overseas Development Institute, vol. 26(6), pages 713-726, November.
    32. Abdur Chowdhury & George Mavrotas, 2006. "FDI and Growth: What Causes What?," The World Economy, Wiley Blackwell, vol. 29(1), pages 9-19, January.
    33. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gibogwe, Vincent & Nigo, Ayine & Kufuor, Karen, 2022. "FDI and economic growth in SADC region," MPRA Paper 115029, University Library of Munich, Germany, revised 29 Sep 2022.
    2. Akisik, Orhan & Gal, Graham & Mangaliso, Mzamo P., 2020. "IFRS, FDI, economic growth and human development: The experience of Anglophone and Francophone African countries," Emerging Markets Review, Elsevier, vol. 45(C).
    3. Sunde, Tafirenyika, 2016. "Foreign direct investment and economic growth: ADRL and causality analysis for South Africa," MPRA Paper 72382, University Library of Munich, Germany, revised Jun 2016.
    4. Nur Feriyantoa & Muafi & Dityawarman El Aiyubbic, 2019. "Regional spillover effect to Gross Regional Development Product (GRDP) in The Special Region of Yogyakarta, Indonesia," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 6(3), pages 1318-1334, March.
    5. Ijirshar, Victor Ushahemba & Andohol, Jerome, 2022. "Investment-growth nexus in West Africa: An assessment of whether fragility matter," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 1-17.
    6. Ghazouani, tarek, 2018. "Reexamining the Foreign direct investment, Renewable energy consumption and Economic growth nexus: Evidence from a new Bootstrap ARDL test for Cointegration," MPRA Paper 103348, University Library of Munich, Germany, revised 11 Sep 2020.
    7. Zezethu Zandile & Andrew Phiri, 2019. "Fdi As A Contributing Factor To Economic Growth In Burkina Faso: How True Is This?," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-27, March.
    8. Hlongwane, Nyiko Worship & Mmutle, Tumelo Donald & Daw, Olebogeng David, 2021. "The relationship between foreign direct investment and economic growth in SADC region from 2000 to 2019: An econometric view," MPRA Paper 111008, University Library of Munich, Germany.
    9. Sunde, Tafirenyika, 2017. "Foreign direct investment, exports and economic growth: ADRL and causality analysis for South Africa," Research in International Business and Finance, Elsevier, vol. 41(C), pages 434-444.
    10. Khobai Hlalefang & Hamman Nicolene & Mkhombo Thando & Mhaka Simba & Mavikela Nomahlubi & Phiri Andrew, 2018. "The FDI-Growth Nexus in South Africa: A Re-Examination Using Quantile Regression Approach," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(3), pages 33-55, December.
    11. Magazzino, Cosimo & Mele, Marco, 2022. "Can a change in FDI accelerate GDP growth? Time-series and ANNs evidence on Malta," The Journal of Economic Asymmetries, Elsevier, vol. 25(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carike Claassen & Elsabé Loots & Henri Bezuidenhout, 2011. "Chinese Foreign Direct Investment in Africa," Working Papers 261, Economic Research Southern Africa.
    2. Muhammad Arshad Khan, 2007. "Foreign Direct Investment and Economic Growth: The Role of Domestic Financial Sector," PIDE-Working Papers 2007:18, Pakistan Institute of Development Economics.
    3. Ghazouani, tarek, 2018. "Re-examining the Foreign direct investment, Renewable energy consumption and Economic growth nexus: Evidence from a new Bootstrap ARDL test for Cointegration," MPRA Paper 89975, University Library of Munich, Germany.
    4. Mohammad Sharif Karimi & Andrzej Cieslik, 2017. "Foreign Knowledge Spillovers and Total Factor Productivity Growth: Evidence from Four ASEAN Countries," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 21(2), pages 267-299, Spring.
    5. Vinish Kathuria, 2019. "Growth and Investment: Testing for the Relationship for South Asian Countries," Millennial Asia, , vol. 10(3), pages 337-371, December.
    6. Mouna Gammoudi & Mondher Cherif & Simplice Asongu, 2016. "FDI and Growth in the MENA countries: Are the GCC countries Different?," Working Papers of the African Governance and Development Institute. 16/015, African Governance and Development Institute..
    7. Belloumi, Mounir, 2014. "The relationship between trade, FDI and economic growth in Tunisia: An application of the autoregressive distributed lag model," Economic Systems, Elsevier, vol. 38(2), pages 269-287.
    8. Khobai Hlalefang & Hamman Nicolene & Mkhombo Thando & Mhaka Simba & Mavikela Nomahlubi & Phiri Andrew, 2018. "The FDI-Growth Nexus in South Africa: A Re-Examination Using Quantile Regression Approach," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(3), pages 33-55, December.
    9. Shahbaz, Muhammad & Nasreen, Samia & Abbas, Faisal & Anis, Omri, 2015. "Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries?," Energy Economics, Elsevier, vol. 51(C), pages 275-287.
    10. Dadson Awunyo-Vitor & Ruby Adjoa Sackey, 2018. "Agricultural sector foreign direct investment and economic growth in Ghana," Journal of Innovation and Entrepreneurship, Springer, vol. 7(1), pages 1-15, December.
    11. Anis Omri & Amel Sassi-Tmar, 2015. "Linking FDI Inflows to Economic Growth in North African Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 6(1), pages 90-104, March.
    12. Burcu Turkcan & I. Hakan Yetkiner, 2010. "Endogenous determination of FDI growth and economic growth: the OECD case," International Journal of Public Policy, Inderscience Enterprises Ltd, vol. 5(4), pages 409-429.
    13. Johnson, Andreas, 2006. "The Effects of FDI Inflows on Host Country Economic Growth," Working Paper Series in Economics and Institutions of Innovation 58, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    14. Asafo-Agyei, George & Kodongo, Odongo, 2022. "Foreign direct investment and economic growth in Sub-Saharan Africa: A nonlinear analysis," Economic Systems, Elsevier, vol. 46(4).
    15. Mounir Belloumi & Atef Alshehry, 2018. "The Impacts of Domestic and Foreign Direct Investments on Economic Growth in Saudi Arabia," Economies, MDPI, vol. 6(1), pages 1-17, March.
    16. Burcu Türkcan & Alper Duman & I. Hakan Yetkiner, 2008. "How Does FDI and Economic Growth Affect Each Other? The OECD Case," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Oguz Esen & Ayla Ogus (ed.), Proceedings of the Conference on Emerging Economic Issues in a Globalizing World, pages 21-40, Izmir University of Economics.
    17. Chung‐Hua Shen & Chien‐Chiang Lee & Chi‐Chuan Lee, 2010. "What Makes International Capital Flows Promote Economic Growth? An International Cross‐Country Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(5), pages 515-546, November.
    18. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    19. Askandarou Diallo, & Jacolin Luc, & Isabelle Rabaud., 2021. "Foreign Direct Investment and Domestic Private Investment in Sub-Saharan African Countries: Crowding-In or Out ?," Working papers 816, Banque de France.
    20. Nicholas M. Odhiambo, 2022. "Does Foreign Direct Investment Spur Economic Growth? New Empirical Evidence From Sub-Saharan African Countries," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 67(233), pages 61-84, April – J.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:soinre:v:122:y:2015:i:1:p:45-64. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.