Non-Automatic Influence of Foreign Direct Investment (FDI) on Growth

Abstract:

The study use fixed effect and first difference estimation method in a panel data of 49 African economies to evaluate the position of the quality of institutions, stock of human capital, trade openness and inflation rate on facilitating the influence of foreign direct investment (FDI) on growth for the period between 1990 and 2016. The results show that FDI is positively and statistically significant contributing to growth in fixed effect estimation and insignificant in first difference estimation. Human capital show positive relationship with growth but statistically insignificant yet inflation rate has statistically significant with negative influence on growth. The results reveal that the contribution of FDI on growth is uplifted by the quality of the institutions, open trade and natural resources. I found strong positive coefficients on the quality of institutions implying that quality of institutions has a vital role in boosting growth of African economies. Both interaction term between FDI and natural resources (FDI*Resource Dummy), that of FDI and human capital (FDI*HC) shows positive relationship with growth but statistically insignificant, yet the interaction term of FDI and quality of institution (FDI*QI) reveal negative relationship with growth. These statistical insignificant coefficients of the interaction terms signifies that in order to accelerate their growth African economies should put more emphasis on reforming their institutions in line with improving their human capital in such a way that they can be able to absorb and realize the FDI spillovers into their economies.