Towards a Multidimensional Model for Evaluating the Sustainable Effect of FDI on the Development of Host Developing Countries: Evidence from Africa

Abstract

This study aims to comprehensively evaluate the sustainable impact of FDI on the development of host African countries. Previous empirical studies seem to have overestimated the impact of FDI by limiting its effects to one aspect or sub-aspect of sustainable development. This study focuses on the sustainable/net effect of FDI on development in Africa. To achieve this, a multidimensional model that combines two opposing views (mainstream theory of economic development and dependent theory) was tested. Panel data of 35 African countries with the PMG/ARDL approach were used to probe the sustainable effect of FDI from 1990 to 2020. The key findings of this study reveal that the overall estimated sustainable effect of FDI on real GDP per capita is statistically minuscule for the entire sample. Thus, the effect of FDI on the development of host African countries is not inherently more important. The most striking result that emerged from the data is that environmental degradation is the dominant variable that adversely influences overall development in Africa. Another striking finding that emerged from the data is that income inequality, in general, has a significant negative impact on real GDP per capita in the long run. More importantly, the results of this study confirm that CO2, GINI, and GOV play important roles in the relationship between FDI and African development. Estimates of the error correction term for each specific country are negative and statistically significant. The fastest speed of adjustment was observed in Morocco, while the lowest was recorded in South Africa. Furthermore, this study presents different policy implications based on the long-term results.