The FDI and Economic Growth Controversy in Sub-Saharan Africa

  • Yemane Michael


This paper analyzes the impact of foreign direct investment (FDI) on economic growth in sub-Saharan African (SSA) countries for which relevant macroeconomic data is available for the period 2001–2015. To attain this objective it develops a dynamic panel system Generalized Method of Moments (GMM) model to capture the impact of FDI on economic growth. The choice of GMM is not haphazard or without purpose. It is superior to other models in that it takes care of endogeneity problems and alleviates possible biases in estimation. Forty-three SSA countries for which data is available were included in the study. The countries were categorized into ‘resource-rich’ and ‘resource-poor’ on the basis of the IMF (2013) classification using data about natural resource endowments and other factors. Our study found that there is no meaningful difference in the growth of per capita GDP and in the countries’ abilities to attract FDI inflows. Our findings indicate that FDI had a negative and statistically significant effect on the growth rate of per capita GDP in SSA for the period under consideration. However, the own lagged value of the growth rate of per capita GDP, gross capital formation (which is used as a proxy for domestic investment) and exports had a positive and statistically significant effect on the growth rate of per capita income.


FDI Economic growth SSA Dynamic system GMM 

JEL Classification Codes

C13 C23 E22 F21 F43 



I would like to thank my main supervisor Professor Almas Heshmati, Jonkoping University, Sweden, for his contribution in improving the quality of this paper. I am also grateful for the help that I got from my co-supervisor Dr Adane Tuffa, Addis Ababa University, Ethiopia. Thanks are also due to my friends Fikru Debelie and Kahsay Berhane for their comments after reading certain sections of this paper. My special thanks also to the participants from the University of Rwanda (UR) International Scientific Conference Week that was held on 14–16 June 2017. However, all errors that are there are mine.


  1. Acemoglu, D. and J.A. Robinson (2006). Economic Origins of Dictatorship and Democracy. New York: Cambridge University Press.Google Scholar
  2. Addison, T. and A. Heshmati (2004). The New Global Determinants of FDI Flows to Developing Countries: The Importance of Ict and Democratization. Monetary Integration, Markets and Regulation: Research in Banking and Finance (4): 151–186.Google Scholar
  3. Agrawal, G. (2011). Impact of FDI on GDP Growth: A Panel Data Study. European Journal of Scientific Research, 57(2): 257–264.Google Scholar
  4. Agrawal, G. (2015). Foreign Direct Investment and Economic Growth in BRICS Economies: A Panel Data Analysis. Journal of Economics, Business and Management, 3(4): 421–428.Google Scholar
  5. Alege, P. and A. Ogundipe (2013). Sustaining Economic Development of West African Countries: A System GMM Panel Approach. Munich Personal RePEc Archive. Available at:
  6. Alfaro, L., A. Chanda, S. Kalemi-Ozcan, and S. Sayek (2004). FDI and Economic Growth: The Role of Local Financial Markets. Journal of International Economics, 64(1): 89–112.Google Scholar
  7. Anderson, J. (2006). ‘What Happened to the MNCs?’ UBS Investment Research: Asia Focus.Google Scholar
  8. Ang, J.B. (2009). Financial Development and the FDI-growth Nexus: The Malaysian Experience. Applied Economics, 41(13): 1595–1601.Google Scholar
  9. Arellano, M. and S. Bond (1991). Some Test of Specification for Panel Data: Monte Carlo Evidence and An Application to Employment Equations. Review of Economic Studies, 58(2): 277–297.Google Scholar
  10. Arellano, M. and O. Bover (1995). Another Look at the Instrumental Variable Estimation of Error-components Models. Journal of Econometrics, 68(1): 29–51.Google Scholar
  11. Ashraf, A., Herzer, D., and Nunnenkamp, P. (2016). The Effects of Greenfield FDI and Cross-border M&As on Total Factor Productivity. The World Economy, 39: 1728–1755.
  12. Asiedu, E. and D. Lien (2011). Democracy, Foreign Direct Investment and Natural Resources. Journal of International Economics, 84(1): 99–111.Google Scholar
  13. Barro, R. and J.W. Lee (1994). Sources of Economic Growth. Paper Presented at the Carnegie Rochester Conference Series on Public Policy.Google Scholar
  14. Beugelsdijk, R.S. and R. Zwinkels (2008). The Impact of Horizontal and Vertical FDI on Host Country Economic Growth. International Business Review, 17: 452–472.Google Scholar
  15. Blundell, R. and S. Bond (1998). Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics Review, 87(1): 115–143.Google Scholar
  16. Borensztein, E., J. de Gregorio, and J.W. Lee (1998). How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics, 45: 115–135.Google Scholar
  17. Bornschier, V. and C. Chase-Dunn (1985). Transnational Corporations and Under-development. New York: Prager Publishers.Google Scholar
  18. Buckley, P.J. (2003). FDI and Growth for Developing Countries: MNEs and the Challenges of the ‘New’ Economy. Paper Presented at The Role of Industrial Development in the Achievement of the Millennium Development Goal. Proceedings of the Industrial Development Forum and Associated Round Tables, United Nations Industrial Development Organization, Vienna.Google Scholar
  19. Carkovic, M. and R. Levine (2002). Does Foreign Direct Investment Accelerate Economic Growth? Minneapolis, MN: University of Minnesota.Google Scholar
  20. Chika, O.G. (2014). Determinants of Foreign Direct Investment into Sub-Saharan Africa and Its Impact on Economic Growth. PhD thesis, Bournemouth University, UK.Google Scholar
  21. Coviello, D. and R. Islam (2006). Does Aid Help Improve Economic Institutions? World Bank Policy Research Working Paper No. 3990.Google Scholar
  22. De Mello, L.R. (1997). Foreign Direct Investment in Developing Countries and Growth: A Selective Survey. Journal of Development Studies, 34(1): 1–34.Google Scholar
  23. Dollar, D. and A. Kraay. (2004). Trade, Growth, and Poverty. Economic Journal, 114(493): 22–49.Google Scholar
  24. Fedderke, J.W. and A.T. Romm (2006). Growth Impact and Determinants of Foreign Direct Investment into South Africa (1953–2003). Economic Modelling, 23: 738–760.Google Scholar
  25. Gholami, R., S.Y. Tom Lee, and A. Heshmati (2006). The Causal Relationship Between Information and Communication Technology and Foreign Direct Investment. The World Economy, 29(1): 43–62.Google Scholar
  26. Gillman, M., M.N. Harris, and L. Mátyás (2004). Inflation and Growth: Explaining a Negative Effect. Empirical Economics, 29(1): 149–167.Google Scholar
  27. Haddad, M. and A. Harrison. (1993). Are There Positive Spillovers from Direct Foreign Investment? Evidence form Panel Data for Morocco. Journal of Development Economics, 42: 51–74.Google Scholar
  28. Heshmati, A. and R. Davis (2007). The Determinants of Foreign Direct Investment: Flows to the Federal Region of Kurdistan. Discussion Paper No. 3218. Institute for the Study of Labor (IZA).Google Scholar
  29. IMF (2013). Boom, Bust, or Prosperity? Managing Sub-Saharan Africa’s Natural Resource Wealth. Washington D.C.Google Scholar
  30. Islam, N. (1995). Growth Empirics: A Panel Data Approach. Quarterly Journal of Economics, 110(4). 1127–1270.Google Scholar
  31. Kamara, Y.U. (2013). Foreign Direct Investment and Growth in Sub-Saharan Africa: What are the Channels? University of Kansas.Google Scholar
  32. Lamine, K.M. (2010). Foreign Direct Investment Effect on Economic Growth: Evidence from Republic of Guinea in West Africa. International Journal of Financial Research, 1(1): 49–54.Google Scholar
  33. Li, X. and X. Liu (2005). Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship. World Development, 33(3): 393–407.Google Scholar
  34. Lucas, R. (1993). On the Determinants of Direct Foreign Investment: Evidence from East and Southeast Asia: 391–406. Available at:
  35. Mileva, E. (2008). The Impact of Capital Flows on Domestic Investment in Transition Economies. Working Paper Series. European Central Bank. Frankfurt, Germany.Google Scholar
  36. Miller, S.M. and M.P. Upadhyay (2000). The Effects of Openness, Trade Orientation, and Human Capital on Total Factor Productivity. Journal of Development Economics, 63: 399–423.Google Scholar
  37. Mody, A. and A.P. Murshid (2005). Growing Up with Capital Flows. Journal of International Economics, 65: 249–299.Google Scholar
  38. Nickell, S. (1981). Biases in Dynamic Models with Fixed Effects. Econometrica, 49(6): 1417–1426.Google Scholar
  39. Ogundipe, A.A., P. Ojeaga, and O.M. Ogundipe (2014). Is Aid Really Dead? Evidence from Sub-Saharan Africa. International Journal of Humanities and Social Science, 4(10): 300–314.Google Scholar
  40. Osvaldo, S. (1969). National Development Policy and External Dependence in Latin America. Journal of Development Studies VI: 23–48.Google Scholar
  41. Ramirez, M.D. (2000). Foreign Direct Investment in Mexico: A Cointegration Analysis. Journal of Development Studies, 37: 138–162.Google Scholar
  42. Romer, P. (1986). Increasing Returns and Long Run Growth. Journal of Political Economy, 94(5): 1002–1037.Google Scholar
  43. Roodman, D. (2009a). How to Do xtabond2: An Introduction to Difference and System GMM in Stata. Stata Journal, 9(1): 86–138.Google Scholar
  44. Roodman, D. (2009b). A Note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics, 71: 135–158.Google Scholar
  45. Sala, H. and P. Trivin (2014). Openness, Investment and Growth in Sub-Saharan Africa. Journal of African Economies, 1–33. Available at:
  46. Saqib, N., M. Masnoon, and N. Rafique (2013). Impact of Foreign Direct Investment on Economic Growth of Pakistan. Advances in Management & Applied Economics, 3(1): 35–45.Google Scholar
  47. Solow, R.M. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1): 65–94.Google Scholar
  48. Stoneman, C. (1975). Foreign Capital and Economic Growth. World Development, 3(1): 11–23.Google Scholar
  49. Suleiman, N.N., S.R. Kaliappan, and N.W. Ismail (2013). Foreign Direct Investments (FDI) and Economic Growth: Empirical Evidence from Southern Africa Customs Union (SACU) Countries. International Journal of Economics and Management, 7(1): 136–149.Google Scholar
  50. UNCTAD (2006). World Investment Report: FDI from Developing and Transition Economies: Implications for Development.Google Scholar
  51. UNCTAD (2014). World Development Report: Investing in SDGs, An Action Plan.Google Scholar
  52. UNCTAD (2015). World Investment Report: Reforming International Investment Governance.Google Scholar
  53. UNCTAD (2016). FDI Data.Google Scholar
  54. Wang, M. (2010). Foreign Direct Investment and Domestic Investment in the Host Country: Evidence from Panel Study. Applied Economics, 42(29): 3711–3721.Google Scholar
  55. World Development Report (2016). Mind, Society, and Behavior. World Bank. Washington, DC.Google Scholar
  56. World Economic Outlook (2016). World Economic Outlook (WEO) Database 2016. IMF.Google Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Yemane Michael
    • 1
    • 2
  1. 1.Department of EconomicsCollege of Business and Economics, Addis Ababa UniversityAddis AbabaEthiopia
  2. 2.University of GondarGondarEthiopia

Personalised recommendations