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

  • Léonce Ndikumana
  • Sher Verick

While the recent increase in foreign direct investment (FDI) to African countries is a welcome development, the impact of these resource inflows on economic development remains in doubt. This article argues that a key channel is its effects on domestic factor markets, especially domestic investment, and analyses the two-way linkages between FDI and domestic investment in sub-Saharan Africa. The results suggest, first, that FDI crowds in domestic investment and, secondly, that private investment is a driver of FDI, implying that African countries will gain much from improving the domestic climate. Moreover, there are alternatives to resource endowments as a means of attracting foreign investment to non-resource-rich countries. Copyright (c) The Authors 2008. Journal compilation (c) 2008 Overseas Development Institute..

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Article provided by Overseas Development Institute in its journal Development Policy Review.

Volume (Year): 26 (2008)
Issue (Month): 6 (November)
Pages: 713-726

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Handle: RePEc:bla:devpol:v:26:y:2008:i:6:p:713-726
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  1. Andrew MOLD, 2004. "Fdi And Poverty Reduction: A Critical Reappraisal Of The Arguments," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 20, pages 91-122.
  2. 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.
  3. Dirk Willem te Velde, 2003. "Do Workers in Africa Get a Wage Premium if Employed in Firms Owned by Foreigners?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(1), pages 41-73, March.
  4. Léonce Ndikumana, 2003. "Capital Flows, Capital Account Regimes, and Foreign Exchange Rate Regimes in Africa," Working Papers wp55, Political Economy Research Institute, University of Massachusetts at Amherst.
  5. Asiedu, Elizabeth, 2005. "Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability," Working Paper Series RP2005/24, World Institute for Development Economic Research (UNU-WIDER).
  6. Breitung, J. & Pesaran, M.H., 2005. "Unit Roots and Cointegration in Panels," Cambridge Working Papers in Economics 0535, Faculty of Economics, University of Cambridge.
  7. Smarzynska, Beata & Spartareanu, Mariana, 2004. "Do foreign investors care about labor market regulations?," Policy Research Working Paper Series 3275, The World Bank.
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