1

Foreign Direct Investment And Growth: New Evidences from Sub-

Saharan African countries

B Seetanah A J Khadaroo School Public Policy & Management Department of Economics & Statistics University of Technology, Mauritius University of Mauritius Pointes-Aux-Sables Reduit Mauritius Mauritius Email: b.seetanah@utm.intnet.mu Email: j.khadaroo@uom.ac.mu

Abstract

The paper investigates the impact of foreign direct investment (FDI) on economic growth

for a panel of 39 Sub-Saharan African countries for the period 1980�2000. An extended

Cobb Douglas production function is used whereby investment is disaggregated into its

different types namely domestic private, foreign direct and public investment for more

insights comparative analysis. Taking into account the possible existence of endogeneity

in FDI modeling, the study employs both static and dynamic panel data estimates. Results

from the analysis suggest that FDI is an important element in explaining economic

performance of Sub Saharan African countries, though to a lesser extent as compared to

the other types of capital. Moreover the study confirms the presence of important

endogeneity in FDI-growth relationship as FDI is not only seen to lead growth but to

follow growth as well.

Key Words: Foreign Direct Investment, Economic Growth Dynamic Panel Data, SSA

JEL classification: C22, F21

2

1. INTRODUCTION

There is a general theoretical consensus among development economists that foreign

direct investment (FDI) inflows is likely to play a critical role in explaining growth of

recipient countries (De Mello, 1997, 1999; Buckley et al., 2002; Akinlo, 2004 provide

detailed literature survey). FDI inflows in fact represent additional resources a country

needs to improve its economic performance and provides both physical capital and

employment possibilities that may not be available in the host market. As De Gregorio

(1992) argued �by increasing capital stock, FDI can increase country�s output and

productivity through a more efficient use of existing resources and by absorbing

unemployed resources�. However, the economic impact of FDI remains more contentious

in empirical than in theoretical studies. While many studies observe positive impacts of

FDI on economic growth, others also reported a negative relationship and among the

main reasons for this controversy remain data insufficiency and methodological flaws.

Earlier cross country studies failed to take into account continuously evolving country-

specific differences in technology, production and socioeconomic factors and it is only

recently that empirical studies have made use of panel data to correct the above ( see

Bende-Nabende & Ford, 1998; Nair-Reichert & Weinhold, 2001; Bende-Nabende et al,

2003; Choe, 2003). Another often ignored fact when analysing the hypothesis has been

the endogeneity issue. In effect, FDI may have a positive impact on economic growth

leading to an enlarged market size, which in turn attracts further FDI as well. This is

referred to as the market size hypothesis, that is markets with rapid economic growths

tend to give multinational firms more opportunities to generate greater sales and profits

and thus become more attractive to their investments. Given the possible interdependency

3

of these two variables, there is a need for a proper test of endogeneity. Moreover a very

scarce amount of work has been devoted on the relationship between FDI and growth in

developing countries, particularly for African economies.

This research thus attempts to complement the few empirical works have undertaken on

the FDI-growth hypothesis in the case of Africa. For aims at investigating the empirical

link between FDI inflows and economic performance for a panel of 39 Sub Saharan

African countries, selected as per data availability, for the period 1980-2000 using panel

data regression techniques. The study further allows for dynamics and endogeneity issues

by using dynamic panel data estimates, namely the Generalised Methods of Moments

(GMM) method. Such empirical evidences from Sub-Saharan African countries are

believed to add to the growing literature in the debate.

The paper is organised as follows, section 2 reviews the literature review, section 3

discusses the empirical approach, the data used and also analyses the econometric results.

The last section concludes the study.

2. LITERATURE REVIEW

Foreign direct investment has been proved in the literature to be an important promoter of

growth in its own right1. In effect, foreign direct investment is argued to increase the

level of domestic capital formation. This also implies producing on large scale which in

1 The vast literature of the effect of foreign direct investment on growth has been surveyed many times. See Akinlo (2004), Buckley et al., (2002); De Mello (1997, 1999) and Borensztein et al (1998) for recent surveys of the literature on FDI.

4

turn results in benefits of economies of scale and specialisation and also increasing export

and employment opportunities. These are likely to result in positive economic impacts.

Foreign direct investment is a particularly key ingredient of successful economic growth

in developing countries because the very essence of economic development is the rapid

and efficient transfer and cross border adoption of �best practices�, be it managerial and

technical best practice or deployment of technology from abroad (Borensztein et al.,

1998)2. Proximity and better access to large market is also well known to attract foreign

direct investment that in turn implies often accelerated technology transfer. As such

better worker training dispensed by foreign investors has often been argued to raise the

level of productivity. Countries can in effect use such firms as catalysts that allow them

to leapfrog stages in development. Foreign direct investment can thus speed up the

structural shift of the economy3. FDI has also been argued to act as a catalyst for inward

investment by complementing local resources and providing a signal of confidence in

investment opportunities (Agosin and Mayer, 2000). New FDI projects may invite

complementary local private investments that provide inputs to, or use outputs of, the

foreign firm. It is also likely that private investment increases by more than the FDI flows

because foreign equity capital finances only part of the total investment project. A

substantial part of foreign investment projects is usually financed from local financial

2 Balasubramanyam, Salisu, and Sapsford (1996) and De Mello (1999) interestingly sumarised FDI as being a composite bundle of capital stock, know-how, and technology, and can augment the existing stock of knowledge in the recipient economy through labor training, skill acquisition and diffusion, and the introduction of alternative management practices and organizational arrangement. 3 In this context, a recent econometric analysis by Barrell and Pain (1997) found that foreign direct investment�s impact on technological change accounted for 30% of labour productivity growth in the UK manufacturing sector between 1985 and 1995.

5

markets as well. It should be noted that the foreign capital inflows, by themselves, can

lead to an increase in domestic credit supply (Jansen, 1995).

FDI also beneficially affect the productive efficiency of domestic enterprises. Local firms

have an opportunity to improve their efficiency by learning and interacting with foreign

firms. FDI can also raise the quality of domestic human capital and improve the know-

how and managerial skills of local firms (the learning by watching effect). Moreover FDI

stimulates the development and propagation of technological skills through multinational

corporations� internal transfers and through linkages and spillovers among firms

(Borensztein et al, 1998). Finally FDI also helps to increase local market competition,

create modern job opportunities and increase market access of the developed world

(Noorbakhsh, Paloni, Youssef, 2001) all of which should ultimately contribute to

economic growth in recipient countries.

Hermes and Lensink (2000) interestingly summarised different channels through which

positive externalities associated with FDI can occur namely: i) competition channel

where increased competition is likely lead to increased productivity, efficiency and

investment in human and/or physical capital. Increased competition may lead to changes

in the industrial structure towards more competitiveness and more export-oriented

activities; ii) training channel through increased training of labour and management; iii)

linkages channel whereby foreign investment is often accompanied by technology

transfer; such transfers may take place through transactions with foreign firms and iv)

6

domestic firms imitate the more advanced technologies used by foreign firms commonly

termed as the demonstration channel

However, FDI may have negative effects on the growth prospects of the recipient

economy if they give rise to a substantial reverse flows in the form of remittances of

profits, and dividends and/or if the transnational corporations (TNCs) obtain substantial

or other concessions from the host country. FDI may not lead to growth rate because

MNCs tend to operate in imperfectly competitive sectors (with high barriers to entry or a

high degree of concentration). As a result, FDI may crowd out domestic savings and

investment. Moreover, FDI may have a negative impact on the external balance because

profit repatriation will tend to affect the capital account negatively. It is also at times

associated with enclave investment, sweatshop employment, income inequality and high

external dependency (Details of negative effects can be found in Ramirez, 2000).

While the literature largely discussed the importance of FDI to growth, one should also

realise that economic growth could be an important factor in attracting FDI flows as well.

The importance of economic growth to attracting FDI is closely linked to the fact that

FDI tends to be an important component of investing firms� strategic decisions. In fact

Brewer (1993) suggests three hypotheses in explaining strategic FDI projects namely,

�efficiency seeking hypothesis�, �resource seeking hypothesis� and �market seeking or

market size hypothesis�. The importance of economic growth in determining FDI flows

can be explained by the market size hypothesis. As Pfefferman and Madarassy (1992)

stated �market size is one of the most important considerations in making investment

7

location decisions for three reasons: larger potential for local sales, the greater

profitability of local sales than export sales and the relatively diverse resources which

make local sourcing more feasible�. In other words, the market size hypothesis predicts

that markets with large populations and/or rapid economic growths (as measured by real

GDP per capita or its growth) tend to give multinational firms more opportunities to

generate greater sales and profits and thus become more attractive to their investments.

Empirical studies by Schneider & Frey (1985), Bajo- Rubio & Rivero (1994) and Wang

& Swain (1995) all support this hypothesis.

Empirical studies

In this part we review the recent empirical evidences4 on the FDI-growth hypothesis and

we focus on cross country analysis mainly. Among the recent popular and influential

work features Borensztein et al., (1998) who tested the effect of FDI on economic growth

in a framework of cross-country regressions for 69 developing countries over the last

decade. Their results suggest that FDI was in fact an important vehicle for the transfer of

technology, contributing to growth in larger measure than domestic investment.

Moreover, the authors also found that there was a strong complementary effect between

FDI and human capital, that is, the contribution of FDI to economic growth was enhanced

by its interaction with the level of human capital in the host country. Earlier works by De

Gregorio (1992) for a panel of 12 Latin American countries and Blomstrom et al. (1996)

for less developed countries also found a strong effect of FDI on economic growth.

4 De Mello (1997) provides an annotated selective survey of earlier studies.

8

Similarly, Campos and Kinoshita (2002) investigated the effects of FDI on 25 transitional

economies of the former Soviet Bloc. Their results concurred with those of Borensztein et

al (1998), indicating that FDI is a significant factor in economic growth. Nyatepe-Coo

(1998) also assessed the contributions of FDI to economic growth in selected countries in

Southeast Asia, Latin America and Sub-Saharan Africa covering the period 1963-1992

following the work of Borensztein et al., (1998). The author reported that FDI did

promote economic growth in the majority of the 12 countries examined.

De Mello (1999) attempted to find support for an FDI-led growth hypothesis with time

series analysis and panel data estimation for a sample of 32 OECD and non-OECD

countries covering the period 1970-1990. His work estimated the impact of FDI on

capital accumulation, output, and TFP growth in the recipient economy. The author

reported that FDI had a positive impact on output growth and also that there was a

dominant complementarity effect between FDI and domestic investment.

Wang (2002) used data from 12 Asian economies over the period of 1987-1997 and

found that total FDI inflows significantly affect economic growth. Disaggregating the

types of flows entering these economies, she found that only FDI in the manufacturing

sector has a significant and positive impact on economic growth and attributes this

positive contribution to FDIs� spillover effects.

Li and Liu (2005) also recently investigated the hypothesis in both developed and

developing countries using a large cross-country sample for the period 1970�99 and

9

accounted for the endogeneity issue. FDI and economic growth were reported to become

significantly complementary to each other and form an increasingly endogenous

relationship only from the mid-1980s. Li and Liu found that there was a strong

complementary connection between FDI and economic growth in both developed and

developing countries. They furthermore reported that FDI not only directly promoted

economic growth by itself but also indirectly did so via human capital. The authors also

confirmed that inward FDI tends to be attracted to any host country with a large market

size.

It is only lately that some studies attempted to test for the direction of causation in FDI

modeling. For instance using data on 80 countries for the period 1971�95, Choe (2003)

detected two-way causation between FDI and growth, but the effects were more apparent

from growth to FDI. Bende-Nabende, Ford, Sen and Slater (2000) found evidence from

the Asia-Pacific Economic Cooperation region that FDI positively affects output directly

and indirectly (through spillover effects) while studying the long-run dynamics of FDI

and its spillovers to output by using cointegration and VAR techniques. They also found

that less advanced countries� output responded more to FDI, human capital, capital

formation, international trade, and new technology than that of advanced countries.

However it should be pointed out that some studies could not also establish positive

relationship between FDI and growth. For instance Carkovic and Levine (2002) uses a

mix of countries and analyzed a data sample of 72 countries, ranging from the United

States to Rwanda, that includes aggregate FDI flows to each of the countries. The results

10

of their analyses indicate that the exogenous component of FDI has no effect on growth.

Durham (2004) also failed to identify a positive relationship between FDI and economic

growth, but instead suggests that the effects of FDI are contingent on the �absorptive

capability� of host countries. This is confirmed by Xu (2000) who investigated US

multinational enterprises as a channel of international technology diffusion in 40

countries from 1966 to 1994. Using data from 10 East Asian economies, Kholdy (1995)

carries out Granger causality tests but does not find causation between FDI and

productivity.

A review of the literature reveals that empirical evidences from African

economies(interested readers can refer to Mwilima, 2003 for an overview of FDI in

Africa) based on rigorous panel data analysis, have been very scarce and moreover mixed

results exists in the existing literature research of FDI-growth. Importantly as well, the

issue of causality and endogeneity has not received treatment until lately and even then

the few works reports mixed reports results from bilateral causality tests. This paper thus

attempts to bring on new evidences from African economies and also account for the

endogeneity issue that may exist in the FDI modelling.

11

3. METHODOLOGY AND ANALYSIS.

We follow recent studies in the field (see Nyatepe-Coo, 1998; De Bende-Nabende and

Ford, 1998; Mello, 1999; Bende-Nabende et al., 2002, 2003 and Li and Liu, 2005 among

others) by specifying an extended Cobb-Douglas production function (equation 1) to

represent the production technology of an economy. Investment is decomposed in three

types namely, domestic private investment, foreign direct investment and also

government investment. Such disaggregation allows us to fully investigate the role of

FDI in economic development and permits useful comparative insights among the

different types of investment as well.

4321 ββββittitititit LGiFDIKAY = (1)

The Cobb-Douglas function is both homothetic and strongly separable and i represents

the countries and t the time dimension.

Y denotes the economy�s output, A the shift in the production function attributed to

technical progress, which is assumed to be risk neutral, K the domestic private

investment, FDI is the foreign direct investment, G is the public investment and L is

labour.

The different investment types of each respective country, that is the domestic private

investment (K), the foreign direct investment (FDI) and the public investment (G) (note

12

that aggregating all these generates each country�s total investment) are measured as the

ratio of the amount of each investment type to the GDP of the country. The main sources

of data are from the International Monetary Fund�s International Financial Statistics (IFS)

(various issues), World Development Indicators (various issues), from African

Development Bank, Selected Statistics on African Countries (2000) and the World

Investment Directory published by the United Nations.

The proxy used for Labour (L) is the employment level of the countries in the sample.

The data were available from the (IFS), World development indicators (various issues)

and from various country Central Statistics Websites. Extrapolation was kept to a

minimum.

The dependent variable output was proxied by the real Gross Domestic Product at

constant price (Y) and was generated from the Summers and Heston (version 6.0). The

data set used covers 39 Sub Saharan African countries5 (as per data availability) over the

period 1980�2000.

Econometric modeling and analysis of results

Taking logs on both sides of the equation (1) and denoting the lowercase variables as the

natural log of the respective uppercase variable results in the following econometric

regression function:

5 Countries in the sample includes the following country:Angola, Benin, Botswana, Burkina Faso, Burundi, Ethopia, Gabon, Gambia, Ghana, Guinea, Guinea Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, SaoTome, Senegal, Seychelles, Sierra Leone, S Africa, Tanzania, Togo, Uganda, Zambia and Zimbabwe.

13

ttttttt lgfdiky εββββα +++++= 4321 (2)

where the coefficients β1, β2, β3 and β4 are the output elasticities of the factor inputs and ε

is the error term

Panel Unit Root Test

A central issue before making the appropriate specification, often ignored by past

researchers, is to test if the variables are stationary or not. We thus carry out panel unit

root tests on the dependent and independent variables. We follow the approach of Im,

Pesaran, and Shin (IPS) (1995), who developed a panel unit root test for the joint null

hypothesis that every time series in the panel is non stationary. This approach is based on

the average of individual series ADF test and has a standard normal distribution once

adjusted in a particular manner. Assuming that the cross-sections are independent, IPS

propose to use the following standardized t-bar statistic .The IPS panel unit root test

ψt

= N t NT

N1 ∑

=

N

i

E1

[tiT (pi,0)]

])0,([11

iiT

N

i

ptVarN∑=

N is the number of panels, NTt is the average of the ADF test for each series across the

panel. The values for E[tiT(pi,0)] and Var[tit(pi,0)] are obtained from the Monte Carlo

14

simulations. The standardized t-bar statistic Ψ t converge weakly to a standard normal

distribution as N and T → ∞. The panel unit root inference is conducted by comparing

the obtained Ψ statistic to critical values from the lower tail of the N (0,1) distribution.

Results of this test applied on our time series in level suggests that we reject a unit root in

favor of stationarity (the results were also confirmed by the Fisher-ADF and Fisher-PP

panel unit root tests) at the 5 percent significance level and it is deemed safe to continue

with the panel data estimates of the above econometric specification (equation 2).

Cross - Section and Pooled OLS Analysis

We performed cross section (averaged over the sample period 1980-2000) and pooled

OLS analysis of our hypothesis for some preliminary results. Standard errors of the OLS

regression were corrected by the White procedure. White (1980) proposed the

heteroskedasticity-robust variance matrix estimator to adjust the standard errors of a

regression in the presence of heteroskedasticity. The results are reported in table 1

(column 2 and 3). The positive and significant coefficient of fdi from the cross section

analysis suggests that FDI has been an ingredient of economic growth of African

economies over the period of study, although to a lesser extent as the other types of

investment. The results are consolidated when using Pooled OLS estimates. The

limitations of using a single-equation OLS cross sectional regression model and pooled

OLS are known (see Kennedy 2003). To overcome these short comings, panel data

techniques are advised. The paper still reports, for comparative purposes and to get a

broad overview the above estimates.

15

Panel Data Estimates.

We employ both static and dynamic (Generalised Methods of Moments) panel data

techniques to analyse the role of FDI in the economic growth of our sample of country. In

fact use of panel data allows not only to control for unobserved cross country

heterogeneity but also to investigate dynamic relations. To test whether to use a random

effect or a fixed effect estimation approach, the Hausman test has been used. In fact the

Hausman test tests the null hypothesis that the coefficients estimated by the efficient

random effects estimator are the same as the ones estimated by the consistent random

effects estimator. The specification test was performed and recommended the use of

random effects model and table 1 (column 4) reports the relevant estimates.

Table 1: Panel data estimates : Random effects (39 countries x 21 years (1980-2000))

Dependent variable y = (log of Y).

Variable Cross Section

Estimates

(average 1980-

2000)

Pooled OLS

estimates

RE robust

estimates/RE

Constant

k

fdi

g

l

9.44

(8.23)

0.2

(1.79)*

0.06

(1.67)*

0.1

(0.57)

0.12

(1.77)*

11.25

(3.52)***

0.33

(5.93)***

0.09

(3.20)***

0.19

(3.75)***

0.18

(10.12)

11.25

(3.99)***

0.34

(5.81)***

0.11

(3.72)***

0.18

(3.65)***

0.18

(10.13)***

16

R2

Number of

observations

Hausman Test

0.40

39

0.40

819

0.35

819

Prob>Chi2=0.503

*significant at 10%, ** significant at 5%, ***significant at 1% The small letters denotes variables in natural logarithmic and t values are in parentheses. The quantities in brackets are the heteroskedastic robust t/z-values. No serial correlation was detected according to Bhargava, Franzini and Narendranathan (BFN) (1982).

Random effects estimates suggests that FDI to Sub Saharan African countries has been an

important element in explaining growth performance, although as earlier seen, to a lower

extent as compared to the other types of capital, namely domestic private and public

capital. This positive contribution is in line with the theoretical underpinnings discussed

earlier. The effect of FDI in these economies is also reported to be relatively less as

compared to other studies, for instance De Gregorio (1992) for Latin American countries,

Borensztein et al., (1998) for a panel countries, Wang (2002) for the Asian economies

case and Campos and Kinoshita (2002) for transitional economies. This may be explained

by the fact that African countries have been among the lowest beneficiaries of FDI.

Foreign direct investment flows to Africa have registered a steady decline during the

years. During the period of study, most FDI flows to developing countries were directed

towards the South, East and South-Eastern Asia followed by Latin America with Africa

accounting for 4-5% of total FDI flow to developing world. According to the WIR (2001)

African share of FDI in the world fell below 1 percent in 2000. Sub-Saharan Africa also

registered the same trend.

17

Sub Saharan African countries have thus been depending mainly on domestic private

investment and public investment as well. Despite the relatively lower flow of FDI in

these economies, explaining probably its small effect, such type of investment is still seen

from the study to play a non negligible role in economic growth. It is believed that higher

level of FDI in these economies would be accompanied with higher growth rates.

Dynamic Panel Data Regression.

As discussed before FDI may have a positive impact on economic growth leading to an

enlarged market size, which in turn attracts further FDI. This is referred to as the market

size hypothesis, that is markets with rapid economic growths tend to give multinational

firms more opportunities to generate greater sales and profits and thus become more

attractive to their investments.

The incorporation of dynamics into our model necessitates our econometric equation to

be rewritten as an AR (1) model in the following.

ititittitit xyyy μβνα +++=− −− 11 (3)

where the LHS is the log difference in tourist arrivals over a period; yit = the log of real

GDP; xit= the vector of explanatory variables, that is x = [k, fdi, g, l] and αt = the period

specific intercept terms to capture changes common to all sectors; μit = the time variant

idiosyncratic error term.

18

Equivalently, above equation can be written as

ititittit xyy μβνα ++++= −1)1( (4)

We can also write the above in first differences

ititittit xyy μβνα Δ+Δ+Δ++=Δ −1)1( (5)

A problem of endogeneity might exist if yt-1 is endogeneous to the error terms through uit-

1, and it will therefore be inappropriate to estimate the above specification by OLS. To

overcome this problem of endogeneity, an instrumental variable need to be used for Δyit-1.

Two approaches, namely Instrumental Variable (IV, Anderson and Hsiao 1982) and two

GMM estimators (Arellano and Bond�s 1991), first and second step respectively, can be

used in this regard. We used the latter technique, as the IV approach leads to consistent

but not necessary efficient estimates of the parameters (see Baltagi 1995). Moreover, the

first step GMM estimator will be used since it has been shown to result in more reliable

inferences. The asymptotic standards errors from the two step GMM estimator have been

found to have a downward bias (Blundell and Bond 1998).

The results from estimating equation (5), extended with some lagged terms, using the

Arellano-Bond (1991) first step GMM estimator are contained in table 3 (in Appendix).

The various estimated equations passes all diagnosis test related to Sargan Test of Over-

identifying restrictions and the Arellano-Bond test of 1st order and 2nd autocorrelation.

19

Table 2: Dynamic Panel Data Estimation (First Step GMM estimator)

Dependent variable y = (log of Y) (39 countries x 21 years(1980-2000))

Variable GMM estimates

Constant

yt-1

k

fdi

g

l

0.005

(2.49)**

0.36

(7.53)***

0.16

(3.95)***

0 05

(3.16)***

0.11

(2.60)**

0.13

(10.96)***

Diagnosis tests

Sargan Test of

Overidentifying restrictions

Arellano-Bond test of 1st

order autocorrelation

Arellano-Bond test of 2nd

order autocorrelation

prob>chi2=0.18

prob>chi2=0.28

prob>chi2= 0.37

*significant at 10%, ** significant at 5%, ***significant at 1% The small letters denotes variables in natural logarithmic, d denotes variables in first difference and the heteroskedastic-robust z-values are in parentheses

The results from the dynamic panel analysis validate the hypothesis that FDI is growth

conducive in our sample of countries even in the short run. Interestingly the positive and

20

significant coefficient of yt-1 from the table suggests that lagged income of the country

contributes positively towards the current level of y confirming the existence of

dynamism and endogeineity in the modeling framework. This is consistent with recent

works from Bende-Nabende, Ford, Sen and Slater (2000) and Choe (2003) and Li and

Liu (2005). In fact the value of the coefficient of the lagged FDI is 0.36 implying a

coefficient of partial adjustment α of 0.64. This means that y in one year is 64 percent of

the difference between the optimal and the current level of y. The other explanatory

variables are also confirmed to be important ingredients in explaining growth pattern in

these countries.

4. CONCLUSIONS.

The paper investigated the relationship between FDI and the economic performance for

the case of 39 African countries over the period 1980-2000. Capital stock, as proxied by

investment ratios, has been disaggregated into its different components namely domestic

private, FDI and public investment as well in an attempt to disentangle the effect of FDI

and for comparative insights. Results from the static random effects estimates shows that

FDI has a positive and significant effect on the level of economic growth and is thus

consistent with the literature, particularly with respect to developing countries. The

contribution of foreign direct investment is however observed to be relatively less as

compared to the other type of investment. Moreover it is also on the lower side as

compared to previous studies on non African economies and this might be explained by

the fact African countries have been among the lowest beneficiaries of FDI. The positive

21

link is also confirmed when using GMM panel estimates which moreover suggested the

presence of dynamic in the system. Thus FDI does not only precede growth and output

level of the country but also followed growth. The above results highlight the economic

importance of FDI and provide new evidences for the case of African economies.

REFERENCES

Agosin M.R. and R. Mayer. (2000). Foreign investment in developing countries: does it

crowd in domestic investment? UNCTAD paper, No.146. UNCTAD, Geneva.

Akinlo A,E.. (2004). Foreign direct investment and growth in Nigeria :An empirical

investigation. Journal of Policy Modeling, 26 (2004) 627�639

Arrelano, M and Bond, S (1991). Some Tests of Specification for panel data: Monte

Carlo Evidence and an application to employment equations, Review of Economic

Studies, 58:277-297.

Anderson, T.W. and C. Hsiao (1982). Formulation and Estimation of Dynamic Models

Using Panel Data, Journal of Econometrics ,18, 67-82.

Bajorubio, O. and Sosvilla-Rivero, S., (1994). An Econometric Analysis of Foreign

Direct Investment in Spain, Southern Economic Journal, No. 61, pp. 104-20

22

Balasubramanyan, V. N., Salisu, M., & Sapsford, D. (1996). Foreign direct investment

and growth in EP and IS countries, The Economic Journal, 106, 92�105.

Barrell, R. and N. Pain. (1996). An Econometrics Analysis of U.S. Foreign Direct

Investment. Review of Economics and Statistics, 78, pp. 200-7.

Bende-Nabende A., and Ford, J.L., (1998). FDI, Policy Adjustments and

EndogenousGrowth: Multiplier Effects from a Small Dynamic Model for Taiwan, 1959-

1995, World Development, Vol. 26 No. 7, pp. 1315-1330

Bende-Nabende, A., J. Ford, B. Santoso, and S. Sen (2003). The Interaction between

FDI, Output and the Spillover Variables: Cointegration and VAR Analyses for APEC,

1965�99. Applied Economics Letters, 10 (3): 165�72.

Blundell and Bond, (1998), Initial conditions and Moments restrictions in dynamic panel

data models, Journal of Econometrics, 87:115-144.

Blomstrom M., Lipsey, R.E and Zejan, M., (1996). Is Fixed Investment the Key to

Economic Growth?, Quarterly Journal of Economics, No. 111, pp. 269-276.

Borensztein, J., J. De Gregorio and J-W. Lee (1998), How does foreign direct investment

affect economic growth?, Journal of International Economics, 45, 115-135.

23

Brewer, T.L., (1993). Foreign Direct Investment in Emerging Market Countries, Chapter

7 of the Global Race on Foreign Direct Investment, The Industrial Institute for Economic

and Social Research.

Buckley, P. J., Clegg, J., Wang, C., & Cross, A. R. (2002). FDI, regional differences and

economic growth: Panel data evidence from China. Transnational Corporation, 11, 1�23.

Campos, N, F. and Y, Kinoshita, (2002), Foreign Direct Investment as Technology

Transferred: Some Panel Evidence from the Transition Economies. William Davidson

Working Paper, Number 438.

Carkovic, M. and R. Levine, (2002), Does Foreign Direct Investment Accelerate

Economic Growth? (unpublished)

Choe, J.I. (2003), Do foreign direct investment and gross domestic investment promote

economic growth?, Review of Development Economics, 7(1), 44-57

De Gregorio, J., (1992). Economic growth in Latin America. Journal of Development

Economics, 39, 58�84.

De Mello, L.R., (1997). Foreign Direct Investment in developing countries and growth: A

Selective Survey, The Journal of Development Studies, Volume 34 No. 1, pp. 1-34

24

De Mello, L.R., (1999). Foreign Direct Investment-led Growth: Evidence from time

series and panel data, Oxford Economic Papers 51, Oxford University Press, pp. 133- 15

Durham, Benson J., (2004), Absorptive Capacity and the Effects of Foreign Direct

Investment and Equity Foreign Portfolio Investment on Economic Growth, European

Economic Review 48(2), pp. 285-306

Hermes, N. and R. Lensink (2000), Foreign Direct Investment, Financial Development

and Economic Growth, SOM Research Report 00E27, University of Groningen, The

Netherlands

Im, K., Pesaran, H., and Y. Shin, (1995), Testing for Unit Roots in Heterogeneous Panels,

DAE Working Papers Amalgamated Series No. 9526, University of Cambridge.

International Labor Organization. International Labor Organization. Retrieved October

28, 2002, From: http://www.ilo.org/public/english/

Jansen K (1995), FDI, Information Technology and Economic Growth in the MENA

Region, World Development, Vol. 23, No. 2, pp. 193-210.

Kennedy, P. (2003). A Guide to Econometrics, 5th. Edition. Cambridge.

25

Kholdy, S., (1995). Causality between foreign investment and spillover efficiency.

Applied Economics, 27.

Liu, X., Burridge, P. and Sinclair, P.J.N., (2002), Relationships between economic

growth, foreign direct investment and trade: Evidence from China, Applied Economics

No. 34, pp. 1433-1440.

Li, X., and X. Liu (2005). Foreign Direct Investment and Economic Growth: An

Increasingly Endogenous Relationship. World Development, 33 (3): 393�407.

Mwilima, N. (2003), Foreign Direct Investment in Africa, Social Observatory Pilot

Project � Final Report � FDI, Africa Labour Research Network

Nair-Reichert, U., and D. Weinhold (2001). Causality Tests for Cross-Country Panels:

A New Look at FDI and Economic Growth in Developing Countries. Oxford Bulletin of

Economics and Statistics, 63 (2): 153�71.

Noorbakhsh, F., A, Paloni and Youssef A., (2001). Human Capital and FDI Inflows to

Developing Countries: New Empirical Evidence, World Development, 26 (7), 1593-

1610.

Nyatepe-Coo, A., (1998), Foreign Direct Investment and Economic Growth in Selected

LDCs, 1963-1992, Handbook on the Globalization of the World Economy Chapter 4

26

edited by Amnon Levy-Livermore, pp. 87-100, Edward Elgar Publishing Inc.,

Massachusetts, 1998.

Pfefferman, G.P. and Madarassy A., (1992), Trends in Private Investment in Developing

Countries, 1992 edition, International Finance Corporation, Discussion Paper No. 14,

Washington D.C.

Ramirez, M. D. (2000). Foreign direct investment in Mexico: A cointegration analysis.

Journal of Development Studies, 37, 138�162.

Schneider, F. and Frey, B. (1985), Economic and Political Determinants of Foreign

Direct Investment, World Development, 13(2), 161-175

Sun, H. (1998). Macroeconomic Impact of Direct Foreign Investment in China: 1979-96.

World Economy, 21 (5): 675�94.

Wang, Z., and Swain, N. (1995), The Determinants of Foreign Direct Investment in

Transforming Economies: Empirical Evidence from Hungary and China,

Weltwirtschaftliches Archiv, Vol. 129, pp. 359-381.

Wang, M., (2002), Manufacturing FDI and Economic Growth: Evidence from Asian

Economies, Department of Economics, University of Oregon mimeo.

27

World Bank (2001). World Development Indicators on CD-Rom.

World Bank (2002), African Development Indicator, CD ROM, Washington DC.

Xu, B., (2000). Multinational enterprises, technology diffusion, and host country

productivity growth, Journal of Development Economics, 62: 477-93.

Zhang, K. H. (2001). Does foreign direct investment promote economic growth?

Evidence from East Asia and Latin America. Contemporary Economic Policy, 19(2),

175�185.

Zhang Z, (2002). Productivity and economic growth: an empirical assessment of the

contribution of FDI to the Chinese Economy�. Journal of Economic Development, 27 (2).