The Effect of Foreign Direct Investment Inflow on Agriculture Output in Somalia

Abstract

This study examines the impact of Foreign Direct Investment (FDI) on agricultural output in Somalia, focusing on the period from 1990 to 2020. Emerging from prolonged political instability and economic challenges, Somalia presents a unique case for understanding FDI's role in its agricultural sector. Employing the Autoregressive Distributed Lag (ARDL) model, this research explores short-term and long-term relationships between agricultural output and variables such as FDI, Gross Domestic Product (GDP), inflation, and trade openness. The findings indicate that FDI and GDP significantly influence agricultural output in the long run, underscoring the importance of economic growth and foreign investment for boosting productivity. Inflation also positively affects agricultural output, suggesting that increased government spending can enhance productivity despite leading to deficits. Conversely, trade openness has a slightly negative long-term effect on agricultural output, though this impact is not robustly significant. In the short term, all variables except trade openness positively influence agricultural productivity, with the latter presenting immediate challenges despite the benefits of global market integration. The study's limitations include focusing on economic factors, excluding political stability, social issues, and institutional quality, which could provide a more comprehensive understanding. A longitudinal analysis could offer deeper insights over time. Recommendations include policies and frameworks to attract FDI, such as incentives, land tenure security, streamlined procedures, and public-private partnerships. Establishing clear, consistent policies can build investor trust and foster a conducive investment atmosphere, enabling Somalia to overcome instability and realize its agricultural potential.