Re–examining Bhagwati hypothesis: the case of some selected countries in Sub-Saharan Africa

Abstract

Bhagwati hypothesis opines that the overall impact of foreign direct investment (FDI) on economic growth is conditioned on countries’ level of integration with the international market. We test this hypothesis for some selected countries in sub-Saharan Africa (SSA). Does this hypothesis hold given our sample evidence? Yes! No! Maybe! We explain why. By invoking the sample splitting and threshold estimation technique, we find that the two measures of openness (trade openness and exports) mediate the FDI-economic growth relationship in three countries and this is an indication of complete Bhagwati hypothesis in these countries. Also, we find that, given the measure of openness, four countries exhibit incomplete Bhagwati hypothesis. Finally, we find no support for the Bhagwati hypothesis for most countries. Based on these findings, we argue that the validity of the Bhagwati hypothesis may be contingent on both country characteristics and the indicator of openness.

Keywords:

• FDI
• economic growth
• trade openness
• exports
• threshold

Disclosure statement

The authors declare that there is no conflict of interest.

Data availability statement

The data used in this study are available on request.

Notes

1 For recent determinants of FDI and trade openness in Africa, see Ibrahim, Ibrahim, and Sare (2019) and Osei et al. (2019) respectively.

2 This approach has also been used recently by Alagidede et al. (2018) and Aluko and Ibrahim (2020b).

3 We do not provide the descriptive statistics of the variables for the countries but are available upon request from the authors. We however report confidence interval graphs for the existence of threshold in the Appendix.

Additional information

Notes on contributors

Muazu Ibrahim

Muazu Ibrahim holds PhD in Economics and Finance from University of The Witwatersrand, Johannesburg, South Africa. He is the Research Officer of Making Finance Work for Africa (MFW4A) Secretariat, African Development Bank (AfDB), Abidjan, Côte d'Ivoire. His research focuses on financial sector development in Africa and international finance where he has published in these areas.

Isaac Koomson

Isaac Koomson (PhD) is a multi-disciplinary researcher whose interests in Development Economics, Finance and Small Business have resulted in published papers in refereed journals. He has currently added Agricultural Economics to his areas of interest. He authored the book "State Fragility and Resilience in sub-Saharan Africa: Indicators and Interventions" which is published by Routledge.

Olufemi Adewale Aluko

Olufemi Adewale Aluko holds a Master of Science degree in Finance from the University of Ilorin, Kwara State, Nigeria. He has published more than fifteen papers in refereed journals.

Eric Evans Osei Opoku

Eric Evans Osei Opoku is currently an Assistant Professor at the University of Nottingham Ningbo China. Prior to this, he has worked as a Research Associate at the University of Hamburg. He obtained his PhD in Economics from City University of Hong Kong.