On the foreign direct investment–economic growth relationship in Africa: does economic freedom mediate this relationship?

Abstract

PurposeIn this study, the authors examine how economic freedom mediates the impact of foreign direct investment (FDI) on economic growth in Africa.Design/methodology/approachBy using data from 41 countries over the period 2000–2017, the authors invoke Seo and Shin's (2016) sample splitting approach while relying on the recently developed Seo et al.'s (2019) computationally robust bootstrap algorithm to achieve the purpose of this study.FindingsThe authors find evidence of economic freedom threshold that bifurcates the link between FDI and economic growth in Africa. More precisely, FDI does not improve overall economic growth for African countries whose economic freedom index is below the estimated threshold while significantly spurring growth for African countries with economic freedom above this threshold.Practical implicationsAfrican countries need to strive towards improving their level of economic freedom through the strengthening of rule of law, reducing government size, promoting regulatory efficiency and further opening of the goods and capital markets.Originality/valueThe association between FDI and economic growth has been well documented. While the positive theoretical postulations are almost conclusive, empirical literature on the precise effect of FDI remains contentious and far from being settled. What is missing in the existing literature in Africa is whether countries' level of economic freedom mediates how FDI explains the variations in economic growth across African countries. The authors fill this research gap.