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Infrastructure and the Impact of Foreign Direct Investment (FDI) on Export Diversification: Evidence from Africa

Author

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  • Augustin Kwasi Fosu

    (Institute of Statistical, Social and Economic Research (ISSER) and Department of Economics, University of Ghana, Legon, Ghana; College of Business and Economics (CBE), University of Johannesburg, Johannesburg, South Africa; Faculty of Economic and Management Sciences (FEMS), University of Pretoria, Pretoria, South Africa; Centre for the Study of African Economies (CSAE), University of Oxford, Oxford, UK)

Abstract

Since independence, most African countries have sought to achieve economic transformation. Export diversification (ED) has been a crucial instrument toward that goal. To attain this ED objective, governments have adopted several strategies, including tax exemptions and the removal of trade restrictions, intended to attract foreign direct investment (FDI). I hypothesize in this paper that the impact of FDI on ED is contingent on the complementary infrastructure available in the host country. Greater availability of infrastructure would attract more ED-enhancing FDI. Using a five-year 1971-2010 panel data on 29 African countries, I estimate a dynamic model involving the usual covariates of the ED equation, including infrastructure and additionally FDI. The estimating methodologies are the generalized least squares (GLS) and the two-step System Generalized Methods of Moments (SYS-GMM). The results indicate that the higher the level of infrastructure, as indicated by the usual measure involving telephone availability, the larger is the positive FDI effect on ED. This is in addition to the favorable independent effect of infrastructure. The findings suggest that in order for African countries to attract the ED-enhancing FDI type, such infrastructure should be appropriately prioritized.

Suggested Citation

  • Augustin Kwasi Fosu, 2023. "Infrastructure and the Impact of Foreign Direct Investment (FDI) on Export Diversification: Evidence from Africa," Working Papers 202312, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202312
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