Foreign direct investment, sectoral output performance and poverty in Africa: Evidence from panel structural vector autoregressive and threshold regression models

Abstract

AbstractAfrican countries are faced with many challenges, which have hindered growth and development, yet they are unable to implement policies to attract adequate external funding for addressing their growth and development challenges. Using a cross‐sectional panel data of 23 African countries, spanning 1996–2020, this study applied a novel panel structural autoregressive model and a modification of the recently introduced dynamic threshold model to analyse the foreign direct investment (FDI)‐growth‐poverty relationship at sectoral level. The study accounted for heterogeneity, simultaneity bias and cross‐sectional dependence in the modelling exercise. Findings suggest that shocks in FDI produced significant positive impact on manufacturing and services output performances in Africa in the short‐term. However, shocks in FDI did not stimulate appreciable effect on agricultural output performance over time. Moreover, the results show that the effect of FDI shocks on human development index (HDI) was greater in the short‐ to medium‐term than in the long‐term. The threshold regression results suggest that higher levels of FDI inflow and HDI are needed for macroeconomic factors to produce significant positive effects on sectoral output performance. This study therefore provided some valuable recommendations to guide evidence‐based policy making in Africa to improve sectoral output and welfare.