The effect of foreign direct investment on the economic growth of Sub-Saharan African countries: An empirical approach

Abstract

The impact of foreign direct investment on the host country’s economic growth has been a source of debate in past theoretical and empirical investigations. The PMG/ARDL model, which has a practical advantage in examining the effect of foreign direct investment in the short and long run, has received little attention in prior empirical investigations. This study investigates the effect of foreign direct investment on the economic growth of Sub-Saharan African countries. The study examined panel data from 22 nations in Sub-Saharan Africa from 1988 to 2019. The PMG/ARDL model was used to look at the short- and long-term effects of foreign direct investment on economic growth. The panel unit root test and panel co-integration test were employed to improve the model’s estimation. According to the findings, in the long run, foreign direct investment has a favorable and significant effect, but it is statistically insignificant in the short run. The study concludes that foreign direct investment boosts long-term economic growth. As a result, countries in Sub-Saharan Africa should focus on attracting foreign direct investment.

Keywords:

• Foreign direct investment
• economic growth
• pooled mean group
• effect
• Sub-Saharan Africa

JEL classification:

• F21
• F43
• O40
• O47

PUBLIC INTEREST STATEMENT

Nowadays, foreign direct investment is considered as a source of external finance in developing countries. Developing countries are working to attract foreign direct investment due to their expectation on technology transfer, human capital development, job creation, increased competitiveness, and the improvement of export. The effect of foreign direct investment on the economy of the host countries is an active issue for researchers, policymakers, and other stakeholders. This study investigates the effect of foreign direct investment on the economic growth of sub-Saharan African countries in the short run and the long run. The study includes 22 sub-Saharan African countries over the period 1988-2019. The findings of this study show that foreign direct investment boosts long-term economic growth in the sampled countries. Thus, sub-Saharan African countries should focus on attracting foreign direct investment. In addition, countries in Sub-Saharan Africa should identify and address the challenges to foreign direct investment.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors have no funding to report.

Notes on contributors

Belesity Bekalu Ayenew

Belesity Bekalu Ayenew is a lecturer of economics at Salale University. His responsibility at Salale University is providing lecture classes, conducting research, and participating in community services. His research interest includes regional integration, international financial flows, cross-country studies, impact evaluation, development, financial sector development, macroeconomic stability. He has ongoing research works related to international financial flows and impact evaluation.