Foreign direct investment in sub-Saharan Africa: Beyond its growth effect

Hassen Wako

#2018-013

This study relates Foreign Direct Investment (FDI) to economic growth, institutional quality and manufacturing value added. To this end, it uses dynamic panel data techniques that allow for parameter heterogeneity and possible non-stationarity in the series. The results confirm that economic growth, institutional quality, and natural resources, each play a positive role in attracting FDI. Besides, institutional quality is not an 'environmental variable' that simply determines economic growth and FDI inflows; it is itself affected both of these variables. Specifically, economic growth enhances institutional quality, whereas FDI appears to raise corruption and undermine the rule of law and accountability. The evidence found also reveals the existence of 'institutional' resource curse - emanating from both natural resources and FDI. Furthermore, FDI has contributed to the 'premature' deindustrialisation of the region, except in a few cases where it is non-resource-seeking. While most of these results are in agreement with some previous studies, the study also identifies detrimental institutional and deindustrialising effects of FDI which have hitherto been overlooked. A policy implication is that countries should be selective on the type of FDI they try to attract by weighing its positive growth effect against its deindustrialising and adverse institutional effects.

Keywords: FDI, Economic Growth, Institutions, Deindustrialisation, sub-Saharan Africa

JEL Classification: F21, F23, O14, O43