Eastern Economic Journal

, Volume 44, Issue 1, pp 97–116 | Cite as

FDI and Trade Policy Openness in Sub-Saharan Africa

  • Godfred William CantahEmail author
  • Gabriel William Brafu-Insaidoo
  • Emmanuel Agyapong Wiafe
  • Abass Adams
Original Article


Trade openness is an important determinant of Foreign Direct Investment (FDI) inflows into Sub-Saharan Africa (SSA). Consequently, studies have examined the relationship between FDI inflows and trade openness. This study develops a new measure of trade openness to re-examine the relationship between FDI inflows and trade policy openness using principal component analysis. This new measure captures the ease of trading activities and trade tariffs. Dynamic panel estimation technique was employed to analyze the relationship between trade policy openness and FDI inflows in SSA countries. The results indicate that an open economy attracts FDI. The study recommends efforts at reducing cost of trade.


FDI Policy Openness FDI 


F13 F21 F41 


  1. Ades, A., and R. Di Tella. 1997. The New Economics of Corruption: A Survey and Some New Results. Political Studies, 45(3): 496–515.CrossRefGoogle Scholar
  2. Anderson, T.W., and C. Hsiao. 1982. Formulation and Estimation of Dynamic Models Using Panel Data. Journal of Econometrics, 18(1): 47–82.CrossRefGoogle Scholar
  3. Anderson, J.E., and J.P. Neary. 1994. Measuring the Restrictiveness of Trade Policy. The World Bank Economic Review, 8(2): 151–169.CrossRefGoogle Scholar
  4. Anyanwu, J.C. 2006. Promoting of Investment in Africa. African Development Review, 18(2): 42–71.CrossRefGoogle Scholar
  5. Anyanwu, J.C. 2011. Determinants of Foreign Direct Investment Inflows to Africa, 1980–2007. Abidjan: African Development Bank Group.Google Scholar
  6. Anyanwu, J.C. 2012. Why does Foreign Direct Investment Go Where it Goes? New Evidence from African Countries. Annals of Economics and Finance, 2(13): 425–462.Google Scholar
  7. Arellano, M., and S. Bond. 1991. Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review Of Economic Studies, 58(2): 277–297.CrossRefGoogle Scholar
  8. Asiedu, E. 2002. On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different? World Development, 30(1): 107–119.CrossRefGoogle Scholar
  9. Asiedu, E. 2006. Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. The World Economy, 29(1): 63–77.CrossRefGoogle Scholar
  10. Asiedu, E. 2013. Foreign Direct Investment, Natural Resources and Institutions. International Growth Center. Retrieved from,
  11. Barthel, F., M. Busse, and R. Osei. 2011. The Characteristics And Determinants of FDI in Ghana. European Journal of Development Research, 23(3): 389–408.CrossRefGoogle Scholar
  12. Behr, A. 2003. A Comparison of Dynamic Panel Data Estimators: Monte Carlo Evidence and an Application to the Investment Function (No. 2003, 05), Discussion Paper Series 1/Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank.Google Scholar
  13. Belassa, B. 1982. Development Strategies in Semi-Industrial Countries. Oxford: Oxford University Press.Google Scholar
  14. Blundell, R., and S. Bond. 1998. Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics, 87(1): 115–143.CrossRefGoogle Scholar
  15. Bojinova, E., and F. Tondel. 2008. Trade Liberalization and the Geographic Location of Industries. Available at
  16. Brainard, S.L. 1997. An Empirical Assessment of the Proximity-Concentration Trade-off Between Multinational Sales and Trade FT. The American Economic Review, 87(4): 520–544.Google Scholar
  17. Busse, M., and C. Hefeker. 2007. Political Risk, Institutions and Foreign Direct Investment. European Journal Of Political Economy, 23(2): 397–415.CrossRefGoogle Scholar
  18. Calvo, G.A., L. Leiderman, and C.M. Reinhart. 1996. Inflows of Capital to Developing Countries in the 1990s. The Journal of Economic Perspectives, 10(2): 123–139.CrossRefGoogle Scholar
  19. Caudros, A., V. Orts, and M.T. Alguacil. 2004. Openness and Growth: Re-Examining Foreign Direct Investment, Trade and Output Linkages in Latin America. Journal of Development Studies, 40(4): 167–192.CrossRefGoogle Scholar
  20. Chakrabarti, A. 2001. The Determinants of Foreign Direct Investments: Sensitivity Analyses of Crosscountry Regressions. Kyklos, 54(1): pp 89–114.CrossRefGoogle Scholar
  21. Chen, B.L. 1999. Trade Openness and Economic Growth: Evidence in East Asia and Latin America. Journal of Economic Integration, 14(2): 265–295.Google Scholar
  22. De Mello Jr, L.R. 1997. Foreign Direct Investment in Developing Countries and Growth: A Selective Survey. The Journal of Development Studies, 34(1): 1–34.CrossRefGoogle Scholar
  23. Deichmann, J.I., A. Eshghi, D.M. Haughton, S. Ayek, and N.C. Teebagy. 2003. Foreign Direct Investment in The Eurasian Transition States. Eastern European Economics, 1(41): 5–34.Google Scholar
  24. Dollar, D., and A. Kraay. 2001. Trade, Growth, and Poverty. World Bank, Development Research Group, Macroeconomics and Growth..Google Scholar
  25. Drukker, D.M. 2008. Econometric Analysis of Dynamic Panel-Data Models Using Stata, in Summer North American Stata Users Group Meeting, July, 24–25.Google Scholar
  26. Dunning, J.H., and S.M. Lundan. 2008. Multinational Enterprises and the Global Economy. Northampton: Edward Elgar Publishing.Google Scholar
  27. Dupasquier, C., and P.N. Osakwe. 2006. Foreign Direct Investment in Africa: Performance, Challenges, and Responsibilities. Journal of Asian Economics, 17(2): 241–260.CrossRefGoogle Scholar
  28. Edwards, S. 1997. Trade Policy, Growth, and Income Distribution. The American Economic Review, 87(2): 205–210.Google Scholar
  29. Edwards, S. 1998. Openness, productivity and growth: what do we really know? The Economic Journal, 108(447): 383–398.CrossRefGoogle Scholar
  30. Globerman, S., and D. Shapiro. 2002. Global Foreign Direct Investment Flows: The Role of Governance Infrastructure. World Development, 30(11): 1899–1919.CrossRefGoogle Scholar
  31. Goodspeed, T., J. Martinez-Vazquez, and L. Zhang. 2006. Are Other Government Policies More Important than Taxation in Attracting FDI? Andrew Young School of Policy Studies Research Paper, (06-28).Google Scholar
  32. Harms, P., and H.W. Ursprung. 2002. Do Civil and Political Repression Really Boost Foreign Direct Investments? Economic Inquiry, 40(4): 651–663.CrossRefGoogle Scholar
  33. Helleiner, G. 2002. Trade Policy and Industrialization in Turbulent Times. London: Routledge.Google Scholar
  34. Holtz-Eakin, D., W. Newey, and H.S. Rosen. 1988. Estimating Vector Autoregressions with Panel Data. Econometrica: Journal of the Econometric Society, 56(6): 1371–1395.CrossRefGoogle Scholar
  35. Hymer, S.H. 1976. The International Operations of National Firms: A Study of Direct Foreign Investment. Vol. 14. Cambridge, MA: MIT press, pp 139–155.Google Scholar
  36. Ingco, M.D. 1997. Has Liberalization Improved Welfare in Least Developed Countries? Yes, World Bank Policy Research Paper 1748, Washington DC: World Bank.Google Scholar
  37. Jansen, N.M. 2003. Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment. International Organization, 57(3): 587–616.Google Scholar
  38. Jolliffe, I. 2002. Principal Component Analysis. New York: Springer.Google Scholar
  39. Kandiero, T., and M. Chitiga. 2006. Trade Openness and Foreign Direct Investment in Africa. South African Journal of Economic and Management Sciences, 9(3): 355–370.CrossRefGoogle Scholar
  40. Kandiero, T., and S. Wadhawan. 2003. Institutional Quality, Openness and Investment in Africa. South African Journal of Economic and Management Sciences, 6(2): 345–368.Google Scholar
  41. Kosteletou, L., and P. Liargovas. 2000. Foreign Direct Investment and Real Exchange Rate Interlinkages. Open Economies Review, 11(2): 135–148.CrossRefGoogle Scholar
  42. Liargovas, P.G., and K.S. Skandalis. 2012. Foreign Direct Investment and Trade Openness: The Case of Developing Economies. Social Indicators Research, 106(2): 323–331.CrossRefGoogle Scholar
  43. Lloyd, P.J., and D. MacLaren. 2002. Measures of Trade Openness Using CGE Analysis. Journal of Policy Modeling, 24(1): 67–81.CrossRefGoogle Scholar
  44. Markusen, J., T. Rutherford, and D. Tarrr. 2002. Foreign Direct Investment in Services and Domestic Market Expertise. Policy Research Working Paper No. 2413. Washington DC: World Bank Publications.Google Scholar
  45. Mileva, E. 2007. Using Arellano-Bond Dynamic Panel GMM Estimators in Stata. New York, Economics Department, Fordham University.Google Scholar
  46. Moosa, I.A., and B.A. Cardak. 2006. The Determinants of Foreign Direct Investment: An Extreme Bounds Analysis. Journal of Multinational Financial Management, 16(2): 199–211.CrossRefGoogle Scholar
  47. Navaretti, G.B., and A.J. Venables. 2004. Multinational Firms in the World Economy. New Jersey: Princeton University Press.Google Scholar
  48. Nishimizu, M., and J. Page. 1991. Trade Policy, Market Orientation and Productivity Change in Industry, in Trade Theory and Economic Reform: Essays in honor of Bela Balassa, edited by Jame De Melo and Andre Sapir Cambridge, MA: Brasil Blackwell.Google Scholar
  49. Nishimizu, M., and S. Robinson. 1986. Productivity growth in manufacturing, in Industrialization and Growth: A Comparative Study, edited by Hollis B. Chenery, Sherman Robinson and Moshe Syrquin. New York: Oxford University Press, pp 283–308.Google Scholar
  50. Nnadozie, E., and U.O. Osili. 2004. US Foreign Direct Investment in Africa and its Determinants, in UNECA Workshop of Financial Systems and Mobilization in Africa, (Vol. 2), November.Google Scholar
  51. Pritchett, L. 1991. Measuring Outward Orientation in Developing Countries: Can It be Done? (Vol. 566) World Bank Publications.Google Scholar
  52. Pritchett, L., and G. Sethi. 1994. Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts. The World Bank Economic Review, 1(8): 1–16.CrossRefGoogle Scholar
  53. Quazi, R.M. 2007. Investment Climate and Foreign Direct Investment: A Study of Selected Countries in Latin America. Global Journal of Business Research, 1(1): 1–13.Google Scholar
  54. Ramirez, M. 2000. Foreign Direct Investment in Mexico: A Cointegration Analysis. The Journal of Development Studies, 37(1): 138–162.CrossRefGoogle Scholar
  55. Sachs, J.D., and A.M. Warner. 1995. Natural resource abundance and economic growth (No. w5398). National Bureau of Economic Research (NBER).Google Scholar
  56. Sala-i-Martin, X. 1994. Cross-sectional Regressions and The Empirics of Economic Growth. European Economic Review, 38(3): 739–747.CrossRefGoogle Scholar
  57. Seim, L.T. 2009. FDI and Openness: Differences in Response across Countries. Working Paper. Norway: Christian Michelsen Institute.Google Scholar
  58. Singh, H., and K.W. Jun. 1995. Some New Evidence on Determinants of Foreign Direct Investment in Developing Countries, The World Bank International Economics Department International Finance Division. Washington DC: World Bank.Google Scholar
  59. StataCorp, L. 2009. Stata Version 11.0. College Station, TX: StataCorp LP.Google Scholar
  60. Tybout, J.R. 1992. Linking Trade and Productivity: New Research Directions. The World Bank Economic Review, 6(2): 189–211.CrossRefGoogle Scholar
  61. UNCTAD 2012. World Investment Report. Geneva: United Nations Publication.Google Scholar
  62. Woolridge, J. 2002. Econometric Analysis of Cross-Section and Panel Data. MIT Press, pp 130,279, 420–449.Google Scholar
  63. World Bank Group ed. 2013. Doing Business 2014: Understanding Regulations for Small and Mediumsize Enterprises. Washington: World Bank Publications.Google Scholar
  64. Zhang, K.H. 2001. Does Foreign Direct Investment Promote Economic Growth? Evidence from East Asia and Latin America. Contemporary Economic Policy, 19(2): 175–185.CrossRefGoogle Scholar

Copyright information

© EEA 2016

Authors and Affiliations

  • Godfred William Cantah
    • 1
    Email author
  • Gabriel William Brafu-Insaidoo
    • 1
  • Emmanuel Agyapong Wiafe
    • 2
  • Abass Adams
    • 1
  1. 1.Department of Economics, University of Cape CoastCape CoastGhana
  2. 2.Department of Banking and Finance, West End University CollegeKasoaGhana

Personalised recommendations