Impact of foreign direct investment on domestic investment : evidence from Sub-Saharan Africa

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Acquah, Jessie Woraewaa
University of Lethbridge. Faculty of Arts and Science
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Lethbridge, Alta : University of Lethbridge, Dept. of Economics
This study examines the impact of Foreign Direct Investment (FDI) on domestic investment for 36 countries in Sub-Saharan Africa (SSA) over the time period 1980–2014, and over two time sub-periods, 1980–1994 and 1995–2014. We investigate whether increased efforts in SSA to attract more FDI have resulted in positive implications of FDI on domestic investment over the years. Our results from the System Generalized Method of Moments (SYS-GMM) estimations suggest that FDI inflows have led to crowding-in of domestic investment for the total time period, and particularly in the second time sub-period. Next, we examine whether the positive effect of FDI on domestic investment occurs in the case of smaller regional groups in SSA. Therefore, we implement the empirical analysis for five selected Regional Economic Communities (RECs) in SSA, covering: Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Economic Community of Central African States (ECCAS), Economic Community of West African States (ECOWAS), and Southern African Development Community (SADC). The results generally show positive impacts of FDI on domestic investment across these RECs, which are consistent with the results obtained for the full sample. We find significant positive effects for COMESA in the first time period, and for ECCAS, ECOWAS, and SADC in the second time period. We extend the empirical analysis by investigating the role played by three development variables (financial development, human capital, and export sector development) in the effect of FDI on domestic investment in SSA. The results show that financial development and human capital tend to lessen the crowding-in effect of FDI on domestic investment in SSA, and could eventually lead to a crowding-out of domestic investment after a certain threshold. In contrast, the results indicate that export sector development tend to augment the crowding-in effect of FDI on domestic investment in SSA.  
domestic investment , export development , FDI , financial development , human capital , SSA