Sustaining Economic Growth in Sub-Saharan Africa: Do FDI Inflows and External Debt Count?

Abstract

The quest for the attainment of economic development is sought after by all global economies, which by effect is expected to transcend to improving livelihoods and standard of living. However, several factors hinder the process of achieving sustained economic development, especially in developing countries. In this regard, assessing the extent of economic expansion orchestrated by foreign direct investment (FDI) inflows in vulnerable economies such as Sub-Saharan Africa (SSA), particularly in the face of the significant fall in global FDI inflow, is worthwhile. In essence, this study ascertains the impact of FDI inflows and external debt on economic growth amidst decline in FDI inflows and excessive foreign borrowings. The mixed order of integration from the stationarity test underpins the adoption of autoregressive distributed lag (ARDL) approach for data covering the period 1990 to 2018. The empirical results found FDI inflows play a crucial role in achieving economic expansion in the region. On average, FDI inflows, external debt, and foreign aids are more useful in expanding the economy compared to trade openness and exchange rate. Thus, this study recommends the need for SSA to open its economic borders for external capital, viz. FDI. A peaceful economic and political environment is a pre-condition to attract and maintain potential foreign investors. Stability in exchange rates is critical in achieving growth in FDI and other foreign resources. However, caution is required, especially in administration of external resources. Particularly, contracting external debt must strictly be driven by economic reasons rather than political motivation. Borrowed funds could be injected mainly into productive streams with the highest investment returns to boost economic development.

Domestic Capital Flow VS Foreign Capital InFlow in Nigeria: Which One Matter Most?

“…The implication is that FDI inflow into Nigeria may be harmful to the economy in the short run. However, in the long run, its spillover effect will erase the negative effect thereby contributing positively to the course of economic growth validating the work of Joshua et al (2021), Gungor and Rigim (2017), Asongu and Odhiambo (2020), Shahbaz & Rahman 2012;. One of the spillover effects could be its role in driving the orphan industries to maturity.…”

“…The result from PP unit root test validates this. Similarly, Figure 2 (a & b) presents the results from the CUSUM and CUSUMSQ stability tests which indicate that the operational model is perfectly fitted and stable as supported by , ) Joshua et al (2021. The submission of these studies are that a model is stable if the blue line falls within the 95% band.…”

Assessing economic effects of foreign aid and capital flows on real economic growth

“…Dang, Nguyen, Trinh, Banh, and Nguyen (2021) found a positive relationship between road infrastructure and ODA which ultimately contributed positively to economic growth. Joshua, Babatunde, and Sarkodie, (2021) instead modelled the effects of external debt and FDI on growth in the sub-Saharan African countries between 1990 and 2018 using the ARDL approach. Empirical results established that both external debt and FDI were instrumental in promoting sustainable growth.…”

External Debt and Foreign Investment: An Empirical Analysis on the Economy of Ghana

“…Similarly, economic policies such as openness to trade aid in the promotion of FDI inflows. Though several studies have assessed the relationship between FDI and external debt, vast of these studies considered these two variables as determining factors for growth (Agyapong and Bedjabeng, 2019;Demikha et al 2021;Fonchamnyo et al 2021;Joshua et al 2021;Tanna et al 2018). Moreover, these studies have been limited to cross-country analysis.…”