Foreign Direct Investment and Economic Growth of Africa

By Sharma, Basu; Abekah, Joe | Atlantic Economic Journal, March 2008 | Go to article overview

Foreign Direct Investment and Economic Growth of Africa


Sharma, Basu, Abekah, Joe, Atlantic Economic Journal


JELs F21 * O47

There is voluminous empirical research dealing with the relationship between foreign direct investment (FDI) and the growth of gross domestic product (GDP) in developing countries. The theoretical underpinnings of this literature are such that an inflow of foreign capital constitutes a net addition to resources available for investment, while an inflow of foreign resources induces public and private sectors to save less and to consume more domestic resources. Thus, the former will predict a growth augmenting effect and the latter a growth retarding effect. However, the empirical literature is short on the role of FDI in the economic growth of African countries. Given the fact that the concern for rapid economic growth is one of the key policy issues in the region, this neglect is unfortunate and needs to be redressed. Against this backdrop, our objective was to examine the effects of FDI on economic growth of 47 African countries during the period of 1990-2003.

Using a standard production function of the Cobb-Douglas type to derive a growth equation, we estimated: economic growth = f (gross domestic capital formation (GDCF) as a ratio of GDP, FDI as a ratio of GDP, extent of openness [measured as a ratio of export + import to GDP] of the economy and growth of labour force). We dropped the variable growth of labour force, since homogeneous labor with unlimited supply a la Arthur Lewis does not have enough potential to contribute to productivity growth. Economic growth is the average annual rate of growth of GDP. The data are taken from the World Tables, published by the World Bank. We assumed a linear function, and ran the model using OLS. It produced the following results:

Economic growth = 0.01 + 0.11 GDCF/GDP + 0.71FDI/GDP - 0.02 Globalization

(3. …

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