Does foreign direct investment spur economic growth? New empirical evidence from sub-Saharan African countries

Abstract

In this study we re-examine the relationship between foreign direct investment (FDI) and economic growth in 27 sub-Saharan African (SSA) countries during the period 1990-2019. Unlike some previous studies, we clustered SSA countries into two groups, namely low-income and middle-income countries. We also employed three panel data techniques in a stepwise fashion, namely the dynamic ordinary least squares (DOLS), the fully modified ordinary least squares (FMOLS), and heterogeneous Granger non-causality approaches. Our results show that while the positive impact of FDI on economic growth is supported by both DOLS and FMOLS techniques in low-income countries, in middle-income countries only the DOLS technique supports this finding. This shows that the impact of FDI may be sensitive to the level of income of the recipient country. Overall, the results show that FDI inflows play a larger role in stimulating economic growth in low-income SSA countries than in middle-income SSA countries. These findings are also corroborated by heterogeneous Granger non-causality results. However, these findings are not surprising, given that many low-income countries tend to be more dependent on inward FDI inflows to stimulate their economic growth than middle- income countries. Policy recommendations are discussed.