Effects of trade and FDI on economic growth in Africa: an empirical investigation

Abstract

The Bhagwati hypothesis predicts a growth enhancing effects of trade (exports) and foreign direct investment (FDI) interaction. This paper tests the validity of the Bhagwati hypothesis by investigating the extent to which the interaction of trade (exports) and FDI has had an impact on economic growth for a sample of 45 African countries over the period 1990–2014. To do so, we estimate an augmented endogenous growth model with the aid of a dynamic system generalised method of moment (GMM) estimation technique, which adequately cope with potential endogeneity issues. The findings reveal support for the Bhagwati hypothesis and provide vital information for policy formulation aimed at promoting more credible export-promotion strategies and channelling of FDI into export-oriented sectors in long-term development strategies in African countries.

Keywords:

• Trade
• exports
• foreign direct investment
• economic growth
• Africa

Notes

Acknowledgements

The authors acknowledge financial support from Volkswagen Foundation within its Postdoctoral Fellowship-Program in the Social Sciences in Sub-Saharan Africa and North Africa. All remaining errors are those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 In Equation (2), $D{I}_{it},T{R}_{it},FD{I}_{it},Z_{it}$ are not expressed in natural logarithm.

2 For a detailed discussion on this point see Brambor, Clark, & Golder (2006) and Sala & Trivín (2014).

3 The interaction term $(T{R}_{it}\ast FD{I}_{it})$ was computed by the product of the centered trade and FDI indicators.

4 Doing this is important because, as explained by Brambor, Clark, & Golder (2006), centering by itself does not alter the statistical efficiency of the marginal effects, instead, it helps give clearer and logical interpretation of the estimated effects.

5 See Table A2 in the Appendix for the list of sampled countries. The coverage of countries and time period was dictated by data accessibility for all the variables considered.

6 Studies such as Le (2009), Baliamoune-Lutz & Ndikumana (2007), and Brueckner & Lederman (2015) recommend the use of Polity IV data for institutional quality.

7 We have used 5-year averages of all data for the following years 1990–1994; 1995–1999; 2000–2004; 2005–2009; 2010–2014.

8 The long run estimates are obtained by implementing the “nlcom” routine in Stata.

9 The values in brackets are the p-values.

10 We have computed the maximum value of exports share to be 0.698. Therefore, we have assumed the case where all countries improve their exports up to the level of the country with this largest value. Hence, a range of values between 0 and 0.7 implies a situation where exports may be absent (value 0) or may be improving (or increasing) up to 0.7 – an approximate maximum value of exports.

11 The values in brackets are the p-values.

12 We have computed the maximum value of FDI to be 0.687. Therefore we have assumed the case where all countries improve their FDI up to the level of the country with this largest value. Hence, a range of values between 0 and 0.7 implies a situation where FDI may be absent (value 0) or may be improving (or increasing) up to 0.7 – approximate maximum value of FDI.

Additional information

Funding

This work was supported by Volkswagen Foundation [grant number 89867].