How Does Foreign Direct Investment Affect Growth in Sub-Saharan Africa? New Evidence from Non-threshold and Threshold Analysis

We draw on the threshold analysis to examine the effect of foreign direct investment on growth in Sub-Saharan Africa. The growth literature is awash with divergent evidence on the role of foreign direct investment (FDI) on economic growth. Although the FDI-growth nexus has been studied in diverse ways, very few studies have examined the problem within the framework of threshold regression analysis. Furthermore, even where this framework has been adopted, none of the previous studies has comprehensively examined the FDI-growth nexus in the broader Sub-Saharan Africa (SSA). In this paper, we revisit, within the standard panel and threshold regression framework, the problem of determining the growth impact of FDI. We use as thresholds six variables – inflation, initial income, population growth, trade openness, financial market development and human capital, and we base the analysis on a large panel-data set that comprises 45 SSA countries for the years 1985-2013. Our results show that the direct impact of FDI on growth is largely ambiguous and inconsistent. However, under the threshold analysis, we find evidence that FDI accelerates economic growth when SSA countries have achieved certain threshold levels of inflation, population growth and financial markets development. This evidence is largely invariant qualitatively and robust to different specifications. FDI enhances growth in SSA when inflation and private sector credit are below their threshold levels while population growth is above its threshold level.