External Debt Accumulation and Foreign Direct Investment Inflows in Sub-Saharan Africa: Analysing the Interaction Effects of Selected Macroeconomic Factors

Abstract

By pooling a sample of 25 countries spanning from 1990–2017, this study analyzed the relationship between external debt accumulation and foreign direct investment inflows in Sub-Saharan Africa. The study employed Panel fixed effects and the Generalized Method of Moments estimation technique in order to address the potential issue of endogeneity. The results of the fixed effects and GMM analysis revealed a significant negative relationship between external debt accumulation and FDI inflows in SSA region. However, when external debt was interacted with macroeconomic variables such as corporate tax, infrastructure development, economic growth and military expenditure, the result shows a positive interaction effect between external debt and infrastructure development on FDI suggesting that external debt can positively influence FDI if channeled into the provision of critical infrastructures. On the other hand, the interaction effect of corporate tax showed a negative relationship between external debt and FDI and provided strong support for the debt overhang theory by Krugman which holds true in SSA region. Finally, economic growth and military expenditure also showed a negative interaction effect.