Trade and Foreign Direct Investment Nexus in West Africa: Does Export Category Matter?

This paper examines the effect of inward FDI in West Africa on exports to EU countries. It investigates from a host country perspective, the impact of FDI on different export categories: primary, intermediate, and final goods. Contrary to previous studies where multinationals are usually engaged in downstream production in the host country, this study presents a “commodity-proximity” model where multinational presence in upstream activities in resource-abundant host countries can stimulate the export of primary and/or intermediate goods to source countries where downstream activities take place. Results from a theoretically augmented gravity model shows that the effect of FDI in host country’s export differs across export categories. Multinational presence in the ECOWAS region is associated with an increase in exports of primary goods, a decrease in exports of intermediate goods, and has no effect on final goods. The paper suggests that in order to achieve export diversification and commodity based industrialization, ECOWAS members should align their investment promotion priorities with their industrialization policies. More FDI should be encouraged in sectors that are vital to industrialization aspirations.