Does export structure enhance the growth gains from foreign investment? Evidence from the ECOWAS region
Abstract
Purpose
This study aims to examine whether diversified economies enhance the growth benefits from foreign direct investment (FDI). Diversified economies benefit from stable export earnings, stable investment composition and greater factor endowments through forward and backward linkages that can leverage superior foreign technology embedded in FDI. This is crucial as many African economies suffer from dependency while FDI is concentrated in the primary sector.
Design/methodology/approach
The authors use a dataset of 15 Economic Community of West African States from 1995 to 2020 and compile variables from various sources, including an export diversification index measured using the Herfindahl–Hirschman index of product concentration. The authors use a growth regression model estimated using dynamic panel estimators to control for endogeneity and simultaneity issues.
Findings
The results show that the effects of direct FDI are insignificant to growth considering diversification and controlling for other confounding factors. Meanwhile, diversification is associated with growth, which highlights the importance of industrial policy. More importantly, the authors find that the marginal effects of FDI are positively and significantly associated with growth when diversification levels are low, implying that production structure matters for the FDI–growth nexus in developing economies.
Originality/value
Previous studies have overlooked the role of export production structure on the FDI–growth nexus. Many developing economies are dependent on primary exports and suffer from dependency, which implies lower levels of factor endowments. As such, this reduces the growth gains from FDI. The authors provide new empirical evidence on the importance of export production structure on the FDI–growth nexus.
Keywords
Acknowledgements
The authors acknowledge the direction of the guest editor, Professor Byung Il Park, and the suggestions provided by two anonymous referees. Lukman Raimi would like to thank Universiti of Brunei Darussalam for providing funding to support this project.
Funding: This work is supported by the Universiti of Brunei Darussalam FIC Research Grant [UBD/RSCH/1.8/FICBF(b)/2022/027].
Conflicts of Interest/Competing Interests: There are no conflicts of interest to declare, and the usual disclaimer applies.
Citation
Haini, H., Wei Loon, P. and Raimi, L. (2023), "Does export structure enhance the growth gains from foreign investment? Evidence from the ECOWAS region", International Journal of Development Issues, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJDI-12-2022-0282
Publisher
:Emerald Publishing Limited
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