Effect Of Foreign Direct Investment And Financial Development On The Economic Growth In The East African Community (original) (raw)
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International rewiev of economics and management, 2021
This paper examines the impact of foreign direct investment on economic growth in the East Africa Community throughout the period 1970-2017. The study used the Pedroni test of cointegration to test the long-run relationship and the VECM tool to inspect the long-run and short-run granger causality between Foreign Direct Investment (FDI) and economic growth. The paper confirmed the integration of order one among the variables under study. The results from the Pedroni cointegration and Vector Error Correction Model (VECM) found that FDI was statistically significant and positively associated to economic growth in the member states of the East African Community (EAC). The gross capital formation also correlated positively with economic progress in the region, while inflation and population growth negatively correlated with economic growth, and thus, the government final consumption expenditure and trade were negatively and positively statistically insignificant respectively. The VECM granger causality exploration discovered a bi-directional granger causality between GDP per capita and population growth. Regarding the policy perspective, the study recommended the member states of the East African Community to strengthen foreign direct investment policy through providing incentives to investors, and providing basic infrastructure, as well as the establishment of a better macroeconomic environment.
Journal of Reviews on Global Economics, 2016
This study examines the causal relationship between FDI and GDP growth in a number of East African countries, focusing on the impact of financial sector development on this relationship. There are strong theoretical reasons to believe that a developed financial sector will enhance the impact of FDI on growth, but empirical evidence remains scant. This study looks first at the short term causal relationship between FDI and GDP growth, using a robust methodology that avoids issues associated with Granger causality testing. This testing indicates little evidence of a relationship. Johansen cointegration testing yields little evidence of a long run relationship when a VECM containing just FDI and GDP growth is estimated, however once variables proxying financial sector development and an interaction variable between FDI and financial sector development are included, we find that although FDI and GDP growth may not be cointegrated directly, there is a relationship running through their interaction with the financial sector, and that FDI only appears to have a positive impact on GDP growth in cases where the financial sector is more developed. This finding is in line with the findings of previous researchers, and has important policy implications.
Foreign Direct Investment, Financial Development and Growth Convergence in ECOWAS
Social Science Research Network, 2021
This essay empirically studies the effects and causal links between foreign direct investment (FDI), financial development (FD) and economic growth. The sample consists of the main economies of lowincome countries and the study covers the period 1990-2015. The results of the estimate show that, under certain specific economic conditions, FDI affects positively the level of long-term economic growth; it thus makes it possible to improve the economic situation of these countries. Using Johansen's cointegration technique, the results find that FD; FDI and GDP growth are cointegrated, that shows the pursuit of the long-term equilibrium relationship between them. The error correction model confirms the existence of a double causal relationship between FDI and GDP growth, and between FD and FDI and between GDP growth and FD.
Foreign Direct Investment (FDI) and Economic Growth in East African Countries
This paper investigates the Impact of Foreign Direct Investment (FDI) on Economic Growth of East African Countries. We apply Fully Modified Ordinary Least Square (FMOLS) technique for the data from 4 East African Community Member Countries (Kenya, Rwanda, Uganda and United Republic of Tanzania) covering the period 1990 to 2015 to examine the long term coefficients after confirmation the existence of panel cointegration. We find foreign direct investment (FDI) accelerates positive impact on economic growth in most of east African countries with significant results at 10 percent level of significance. We suggest that the East African countries region should remain their economies open to attract more potential investors to invest in sectors that promote the economy in order to achieve the desired objectives. 1. Introduction One of the most important reasons for the East African countries (Tanzania, Kenya, Uganda, Rwanda and Burundi) to emphasize on promoting and attracting FDI inflow is helping the sustainability and increasing the speed of their economic growth. This in turns will improve the living standard of the people, decreasing unemployment rate and speedup the rate of economic integrations with other nations. This is because FDI plays an important role in improving and strengthening the ability of the recipient countries to take an action on the opportunities provided by international economic integration, which is recognized as one of the principal aim of any development strategies (Cho, 2003). FDI gives firm cheaper production facilities, intensive skills, access to new technology, creation of new market and market channels. It also increases innovation and financing new methods of production. It bridges the gap between investment requirements and domestic resource availability (UNCTAD, 2013). Recipients' countries benefit from FDI through technological transfer, governing investment in enterprises, growing liberalization of the national regulatory framework and changes in financial markets (Sharma, 2012). FDI has grown at the highest rate from the earliest of 1980s, and the global market for FDI has become more competitive. African countries happen to be the most striking regions to foreign investments because they encourage investors by offering tax incentives, infrastructures, subsidies and import duties with a range of created facilities. Munda (2013) shows that, the inflow of FDI in East African countries are comparatively lower than the inflows into other African regions. UN (2010) verifies this statement by showing that Southern African countries maintain the highest rate of FDI which constitute 31 billion of USD. South Africa and Angola have much contribution in this share, followed by West Africa countries (USD 26 billion). On the other hand, North African countries have contributed USD 24 billion share of FDI, while East African countries have only 6 billion USD of FDI inflows. However, in recent years, there have been significant changes in the FDI in East Africa due to discovery of energy resources such as oil fields in Uganda and mineral resources of gas in the United Republic of Tanzania. This situation has led into a high number of foreign investors to operate their investment in different parts of the East African region. As a result, the inflow of FDI into this region increases from USD 4.5 billion to USD 6.3 billion (40 percent increase) in 2012 (UNCTAD, 2013). In this study, we apply the Fully Modified Ordinary Least Square (FMOLS) technique on the data from 4 East African Countries (Kenya, Rwanda, Uganda and United Republic of Tanzania), covering the period 1990 to 2015, to examine the impact of FDI on economic growth. Our results indicate that FDI contribute positively to growth in the East African counties. The implication of our results is that FDI can be used as an important tool for promoting economic growth in developing countries, especially in East African countries. The rest of the paper is organized as follows: the second section examines the review of literature on FDI-growth linkage; the third section describes the methodology; and the fourth section discusses the empirical results and discusion. Finally, the paper provides summary and concluding remarks of the study.
This paper examines the nexus between Foreign Direct Investment (FDI) and Economic growth in Sub-Sahara Africa using Granger causality test by both Vector Error Correction Model and Vector Autoregression modeling on Time series and Panel Cointegration techniques for sample of thirtyone countries in the period 1980 to 2012. FDI inflows, GDP and GDP per capita are measured in Purchasing Power Parity (PPP) units representing economic growth. The result affirms strong evidence of causality from GDP to FDI for both time series and panel regression investigation
The effect of foreign direct investment on economic growth in developing countries
Transnational Corporations Review
Foreign direct investment amongst other mechanisms provides capital inflow meant to stimulate economic growth. Apart from promoting economic growth, FDI can also lead to increase in employment, technology, technical knowhow and managerial skills. South Africa has implemented various policy initiatives in attempts to attract foreign investment. This study investigates on the effect of foreign direct investment on economic growth, with particular reference to the South African economy. The period of study is from 1980 to 2010. Johansen cointegration and Vector Error Correction Modelling (VECM) framework where utilised as estimation techniques. Variables specified in the methodology include real gross domestic product (RGDP), foreign direct investment (FDI), domestic investment (INVE), real exchange rate (REXCH) and foreign marketable debt (DEBT). The long run results showed that FDI, REXCH and DEBT have a negative impact on growth. INVE has a positive impact on growth. The impulse response and variance decomposition analysis complemented the long and short-run findings. Conclusions and policy recommendations were made using these results.
Financial Development, Growth and FDI, 2021
The study followed up on the observations made by Bara et al., (2016) who observed that there was a deficit in analyzing the growth-finance nexus using data from SADC countries. The purpose of the study was therefore to ascertain the impact of foreign direct investment on economic growth through the domestic financial market channel of SADC countries. A sample of countries from the SADC region was employed with the data ranging from 1980 to 2018. The data was obtained from the IMF and the World Bank's World Development Indicator data base. The regressors used in the study include foreign direct investment, financial sector development, interaction of financial development and foreign direct investment, trade openness, gross capital formation, inflation and government expenditure. Fixed Effects panel regression was used after the Hausman Test revealed that the FEM was the most appropriate model. The outcome of the study revealed that FDI does not have a statistically significant impact on GDP without the interaction with financial sector development. However, the effects were amplified when financial sector development is introduced in the model. With the presence of financial sector development, FDI had a positive and statistically significant impact on GDP and at the same time financial sector development had a positive impact on GDP. Recommendations emanating from the study encourage monetary authorities to strengthen their financial services sector so as to fully benefit from FDI.
Applied Economics and Finance, 2016
This study has analyzed the impact of Foreign Direct Investment (FDI) on Economic growth in 14 Eastern Africa countries by employing 34 years (1980-2013) panel data, using dynamic GMM estimators after checking for autocorrelation and model specification tests. Developing countries have been attracting FDI attempting to reduce resource gaps, technology gap, unemployment and trade deficits. However, unlike classical growth theories, the empirical studies sought inconclusive effect of FDI on growth. The findings confirm that FDI has positive and marginally significant effect of FDI on economic growth, the rate of economic conditional convergence at 5%, absence of significant crowding out effect moving from FDI to domestic investment, interdependence of domestic investment and trade openness in the sub-region. Thus, I conclude that FDI is a key deriver of economic growth and a catalyst to economic conditional convergence in Eastern Africa; so, the subregion need to attract more FDI by improving investment environment, strengthening regional integration, developing human capital and basic infrastructure, and promoting export-oriented investment.
IJSES, 2022
Many countries' growth performance has been linked to the dynamic roles of trade and foreign direct investment (FDI) inflows. This study evaluates the impact of trade openness and foreign direct investment on economic growth in non-West African Economic Monetary union using time series data from the period 1994 to 2019.The data for the study where sourced from World development index (WDI). Co-integration test was employed to determine the existence of co-integration among the variables and from the result the hypothesis of no cointegration was rejected as there is cointegration among the variables. The Auto regressive distributed lag (ARDL) technique was used to examine the short and long run effects of trade share and foreign direct investment on economic growth. And the result shows that FDI_GDP will increase GDP per capita by 0.1% in the long run while TS and CTS will reduce GDP per capita by 11.2% and 0.36% respectively. there exist a long run dynamic relationship between trade share and foreign direct investment on economic growth. From the estimation result the conclusion was drawn that foreign direct investment positively and significantly influences economic growth in the long run in non-WAEMU. And the study recommended that non-WAEMU countries should productively control trade openness through increased investment in local production of manufactured and agricultural goods so as to reduce importation.
Journal of Finance and Investment Analysis, 2017
This paper investigates the moderating effect of economic growth on the relationship between economic integration and foreign direct investment in the East African Community. Developing countries rely on foreign direct investment (FDI) to supplement their low levels of national savings in order to promote economic development. However, low levels of FDI are still a big concern for poor countries. Regional integration is often considered a means to improve member countries’ attractiveness to FDI. From the available anecdotal evidence, the East African region ranks as one of the poorest recipients of FDI in the world. Finance literature records that economic growth as an indicator of the investor potential rate of return as well as population purchasing power catalyzes the rate of foreign direct investment attraction. The research employed an explanatory research design. East African Community was the unit of analysis involving Kenya, Tanzania, Uganda, Rwanda and Burundi...