The causal relationship between Foreign Direct Investment (FDI) and the macro-economy of selected west African countries: Panel ARDL/Granger Causality Analysis

Abstract

This study examined the long run and short run dynamic relationships between macroeconomic variables and FDI in West Africa using recent econometric techniques for Granger non-causality and PMG/ARDL for period of 1990 to 2016. Controlling for the influence of trade openness and exchange rate, the long-run effect of Foreign Direct Investment (FDI) on economic growth and gds are found to be positive and statistically significant. FDI is found to be negative and statistically significant on unemployment indicating that an increase in FDI would significantly reduce unemployment in the selected West African nations in the long-run. The coefficient of error correction model in all the specifications is negative and significant indicating that the short-run disequilibrium is corrected in the long-run. Panel Granger causality tests result indicates that causality do not run from any direction in the short run which could be attributed to poor economic activities among this developing countries and an important revelation for policy implication.

The effects of foreign aid, foreign direct investment and domestic investment on economic growth in African countries: Nonlinearities and complementarities

“…However, the positive relationship that is founded between AID and economic growth is in line with the prior studies of Alemu and Lee (2015), Dalgaard et al (2004), Jena and Sethi (2019), Karras (2006), Ndambendia and Njoupouognigni (2010), Sethi et al (2019), Sothan (2018), and Tait et al (2015), but contrary to Mallik (2008), Liew et al (2012), Niyonkuru (2016), and Yiew and Lau (2018), who found a negative impact of AID on growth in recipient countries. Besides, the positive nexus between FDI and economic growth is similar to previous empirical studies of Borensztein et al (1998), Emmanuel (2014), Olawumi and Olufemi (2016), Umoh et al (2012), Onuoha et al (2018), and Zekarias (2016), suggesting that FDI is an important vehicle for the transfer of technology, which contributes to technological progress and creates a spillover effect, and thereby raises the long‐term growth rate. Indeed, FDI can bring in foreign capital and promote economic growth in developing countries.…”

“…They found that FDI has a direct positive effect on economic growth and suggested that the effect of FDI on growth is dependent on the level of democracy in the host countries. Onuoha et al (2018) explored the causal relationship between economic growth and its macroeconomic determinants in West African countries over the period 1990–2016. Their results highlighted a significant contribution of FDI to economic growth.…”

Inflation and infrastructure sector returns in emerging markets—panel ARDL approach

“…In order to apply appropriate unit root and cointegration tests in panel data, there is need to confirm the presence or absence of cross-sectional dependence in the variables (Mallick, Mallesh, & Behara, 2016;Onuoha, Okonkwo, Okoro, & Okere, 2018). To ensure the validity of the results, the following four CSD tests were applied: Breusch-Pagan LM, Pesaran scaled LM, bias-corrected scaled LM and Pesaran CD.…”

“…The current study made use of three alternative approaches (for comparison purposes), namely, mean group (MG), pooled mean group (PMG) and dynamic fixed effects (DFE) estimators. The three estimators use the maximum likelihood approach and consider the long-run equilibrium and the heterogeneity of the dynamic adjustment process (Onuoha et al, 2018).…”

“…The PMG estimator constrains the long-run coefficients to be homogeneous (similar to DFE), and like the MG estimator, allows the short-run coefficients, error correction terms, intercepts and the error variances to differ freely across the entire cross-section (Fazli & Abbasi, 2018;Onuoha et al, 2018). PMG and MG provide consistent coefficients despite the possible presence of endogeneity because they include the lags of dependent and independent variables.…”