Implications of Macroeconomic Performance on Foreign Direct Investment: A Comparative Study between Emerging and Frontier Economies

Abstract

This paper examines and compares the implications of macroeconomic performance on Foreign Direct Investment (FDI) among thirteen rapidly growing individual-specific Frontier Sub-Saharan African (FSSA) and emerging CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) countries by deploying the Bootstrap ARDL framework. Using data from the World Development Indicators spanning 1995 to 2019, empirical results indicate that macroeconomic variables namely Gross Domestic Product (GDP) and exchange rate exert varying experiences on FDI, with a higher degree of impact in the FSSA than the CIVETS region. Specifically, GDP is positively related to FDI inflow in Botswana, Cote d’Ivoire, Kenya, Mauritius and Senegal for FSSA. Nonetheless, a weak association was experienced in the CIVETS region, as only Vietnam and Turkey were significant. Additionally, exchange rate reported similar level of disparity as the weakening of host country currency draws high volumes of FDI in Botswana, Ghana, Cote d’Ivoire and Kenya in the short-run for FSSA but only Colombia for the CIVETS region. Nevertheless, the impact of inflation seems to matter in both regions. The study strongly indicates that GDP and exchange rate trigger higher volumes of FDI in FSSA countries than the CIVETS, while the impact of inflation is similar in both regions. This asserts that FSSA countries should implement fiscal and monetary policies to stimulate economic growth and stabilize their economies to spur more FDI, while the CIVETS region should consider other macroeconomic factors to stimulate inward FDI.