Modelling composition of growth, FDI and welfare in Africa: a SEM approach

While there have been separate studies on FDI–growth and FDI–welfare links, few or no studies exist that simultaneously examine FDI–growth–welfare link at aggregate or sectoral level. This study adopted a recent causality method and a simultaneous equation model to analyse the effect of FDI on sectoral growth and welfare using a cross-sectional panel of 23 countries, spanning 1990‒2019. The study accounted for sectoral spillover effects, heterogeneity, simultaneity and cross-sectional dependence in our model. Findings suggest that FDI promotes output in the manufacturing and services sectors more than in the agriculture sector, while it fosters human development (HD). Also, the results show that while HD promotes output in the agricultural sector, it deters output in the manufacturing and service sectors. Further findings show that only agricultural output improves HD among the countries. This study therefore recommends that for African countries to improve sectoral output growth and welfare using FDI as a catalyst, a policy framework toward attracting more FDI into the three key sectors (especially in the manufacturing and services) is desirable for increased output and human development in Africa.