Foreign Direct Investment and Economic Growth in Botswana: Evidence from Cointegration and Granger Causality Analysis

Background: Foreign Direct Investment (FDI) is broadly defined as capital flows resulting from the behaviour of multinational companies. Several studies have found the impact of FDI on economic growth to be insignificant. Despite the observed economic growth in Botswana, there is limited empirical evidence examining the specific impact of Foreign Direct Investment (FDI) inflows on this growth. Aims: The study examines the relationship between FDI and economic growth using yearly time series data for the period 1980 to 2012. Methodology: A Multi-model econometric study was conducted to determine the true impact of FDI on economic growth in Botswana. The study uses the Augmented Dickey-Fuller and the Phillips-Perron test to test the stationarity of the variables. Johansen and Juselius' cointegration test was used to test for cointegration. Finally, the study uses the Granger causality test to determine whether FDI influences economic growth. Findings: FDI is regarded as an important driver of economic growth, but empirical evidence reveals that the relationship is not straightforward. Using the Johansen cointegration test applied to a dynamic model, the study found that there is a long-term relationship between FDI and economic growth in Botswana. However, using the Granger causality tests, we were not able to confirm whether it is the FDI that is spurring economic growth or it is economic growth that is promoting FDI inflows. Conclusion: Botswana should therefore continue to create conditions that attract FDI in order to influence economic growth. Further research could use time series models like the vector autoregression model (VAR) to test the linear relationship between FDI and economic growth, including control variables like investment (as a percentage of GDP) and human capital formation.