The threshold regression framework is used to examine the effect of foreign direct investment on growth in Sub-Saharan Africa (SSA). The growth literature is awash with divergent evidence on the role of foreign direct investment (FDI) on economic growth. Although the FDI–growth nexus has been studied in diverse ways, very few studies have examined the relationship within the framework of threshold analysis. Furthermore, even where this framework has been adopted, none of the previous studies has comprehensively examined the FDI–growth nexus in the broader SSA. In this paper, within the standard panel and threshold regression framework, the problem of determining the growth impact of FDI is revisited.
Six variables are used as thresholds – inflation, initial income, population growth, trade openness, financial market development and human capital, and the analysis is based on a large panel data set that comprises 45 SSA countries for the years 1985–2013.
The results of this study show that the direct impact of FDI on growth is largely ambiguous and inconsistent. However, under the threshold analysis, it is evident that FDI accelerates economic growth when SSA countries have achieved certain threshold levels of inflation, population growth and financial markets development. This evidence is largely invariant qualitatively and is robust to different empirical specifications. FDI enhances growth in SSA when inflation and private sector credit are below their threshold levels while human capital and population growth are above their threshold levels.
The contribution of this paper is twofold. First, the paper streamlines the threshold analysis of FDI–growth nexus to focus on countries in SSA – previous studies on FDI-growth nexus in SSA are country-specific and time series–based (see Tshepo, 2014; Raheem and Oyınlola, 2013 and Bende-Nabende, 2002). This paper provides a panel analysis and considers a broader set of up to 45 SSA countries. Such a broad set of SSA countries had never been considered in the literature. Second, the paper expands on available threshold variables to include two new important macroeconomic variables, population growth and inflation which, though are important absorptive capacities but, until now, had not been used as thresholds in the FDI–growth literature. The rationale for including these variables as thresholds stems from the evidence of an empirical relationship between population growth and economic growth, see Darrat and Al-Yousif (1999), and between inflation and economic growth, see Kremer et al. (2013).
The earlier version of this article benefited from the invaluable comments, innumerable pieces of advice and guidance provided by Keisuke Otsu. I thank Miguel Leon Ledesma, Olarewaju Kassim and various MaGHiC and Keynes School of Economics conference and seminar participants for helpful comments in concretizing the ideas documented in this paper. I am grateful to Atanu Goshray and Mathan Satchi for their insightful questions and very useful feedback that helped improve the paper. Bruce Hansen provided advice for sourcing relevant econometric codes. Kolawole Olawole provided excellent research assistance. I thank the journal editor and an anonymous referee whose detailed comments improved the structure, exposition and clarity of this paper. I thankfully acknowledge the generous financial support from AIMS (AIMS Research Grant) in executing this research. The views expressed in this article are exclusively the responsibility of the author(s) and do not in any way reflect the views of the World Bank Group, International Finance Corporation and other past, current or feature teams or research group to which the author(s) is affiliated. All errors remain my own.
Ibhagui, O. (2020), "How does foreign direct investment affect growth in sub-Saharan Africa? New evidence from threshold analysis", Journal of Economic Studies, Vol. 47 No. 1, pp. 149-181. https://doi.org/10.1108/JES-06-2018-0198Download as .RIS
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