Asymmetric effects of foreign direct investment and trade openness on economic growth in Somalia: Evidence from a non-linear ARDL approach

Abstract

Globally, the spread of economic integration and the lowering of trade protectionism through multiple trade pacts offered the products of many developing nations the chance to access global markets. The international economics literature deeply discusses the influence of trade liberalization and foreign investment on economic expansion; however, most assume a symmetric association. It is crucial to evaluate the nonlinear connection, as reliance on linear models might produce biased results. Accordingly, this study explored the asymmetric effects of trade openness and FDI inflows on the economic growth of Somalia using yearly data from 1990 to 2020. The outcomes of the non-linear autoregressive distributed lag (NARDL) suggest that both an increase and decrease in FDI strengthen the economic expansion of Somalia in the short-run and long-run. The domestic investment role in stimulating national output was also considerable. Moreover, the study outlined that a decline in trade openness shrinks growth in the long-run. Besides, we observed from the vector error correction modeling (VECM) a one-way causal linkage from labor force, capital, FDI, and trade openness to GDP in the short-run but not in the long-run. Moreover, short-run unidirectional causation from GDP, trade openness, labor force, and capital to FDI is observed. According to the outcomes, the study proposes that policymakers intensify trade liberalization, encourage local investment, and channel foreign investment toward export-oriented industries.

Keywords:

• Trade openness
• non-linear ARDL
• foreign direct investment
• domestic investment
• Somalia

Reviewing Editor:

• Aye Goodness
• University of Agriculture
• Makurdi Benue State
• NIGERIA

Subject:

• International Trade (incl. trade agreements & tariffs)

Author contributions

The authors have contributed significantly to the writing of this article. Abdikafi Hassan Abdi and Mohd Azlan Shah Zaidi was responsible for the study’s conception, design, and development, writing the first draft of the article, data collection, analysis as well as reviewed and edited the article. Dhaqane Rooble Halane contributed to the literature review. Abdimalik Ali Warsame wrote the discussion section.

Data availability

The datasets used and/or analyzed during the current study are available from the following links: https://data.worldbank.org/indicator/SL.TLF.TOTL.IN?locations=SO; https://www.sesric.org/query.php; and https://unctadstat.unctad.org/wds/TableViewer/dimView.aspx.

Disclosure statement

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

Additional information

Funding

This research is supported by SIMAD University, Somalia (Grant number: SU-PG-2023-015).