Page 1 of 74
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
e-ISSN: 2395-0463
Volume 02 Issue 8
August 2016
Available online:http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 91
The Role of Foreign Direct Investment on
FDI Growth Nexus in Sub-Saharan
African Countries
BY
Ajayi Olaniyi Adewale
Department of Educational Foudation and Management.
Ekiti State University, Ado –Ekiti, Ekiti State, Nigeria
ABSTRACT
This Study investigated the role of foreign direct invest on FDI-growth nexus of 15 Sub-Saharan
African Countries with a view to develop a financial sector that would impact FDI growth
positively. This was necessitated by the lack of attention to the role of financial development in
previous studies. Regression Analysis and TAR Model was adopted with robust methodology
and few modification to suit the need of the study.
The study concluded that government should strive to strengthen these conditions in order to
produce well-functioning economic mechanism and policy makers from Sub Saharan
African countries should increase FDI inflows in the short run by reforming their investment
regulatory framework and implement policy that would promote macroeconomic stability and
improve physical infrastructure.
CHAPTER ONE 1.1 Statement of the problem
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Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
e-ISSN: 2395-0463
Volume 02 Issue 8
August 2016
Available online:http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 92
In recent times, developing countries,
especially in Africa, see the role of foreign
direct investment (FDI) as crucial to their
economic growth and development. FDI is
viewed as an engine of growth as it provides
the much needed capital for investment,
increases competition in the host country
industries, and aids local firms to become
more productive by adopting more efficient
technology or by investing in human and/or
physical capital.
In absolute terms, the global flow of FDI in
2007 was estimated to be about $1.9 trillion
which was the highest the world ever
recorded. The reason for this is not
farfetched as it was due to the financial
crisis which led to global disinvestment.
This assertion can be backed by the fact that
as at 2010, the flow was estimated to be
about $1.2 trillion after a drastic decline in
the global flow in 2009. After a 16 per cent
decline in 2008, global flow fell further by
37 per cent to $1.114 trillion. FDI flows to
the Sub-Saharan Africa (SSA) region have
increased since the beginning of 1990s. The
value of FDI to the region rose from
US$36.7 billion in 1990 to US$108.5 billion
in 2000, and stood at US$336.8 billion as at
2008. In terms of the contribution to the
region’s gross domestic product, available
data also shows some noticeable
improvement. The FDI/GDP ratio
progressively increased from 12.4 percent in
1990 to 36.2 percent in 2008. It is also
interesting to note that the distribution of
FDI flows in the region is getting even, with
29 out of the 47 countries in the region
recording increase in FDI inflows in 2008
(UNCTAD, 2009).
Despite the increased flow of investment to
developing countries, SSA countries are still
characterized by low per capita income, high
unemployment rates as well as low and
falling growth rates of GDP. These are
developmental problems that FDI is
supposed to ameliorate to a great extent. An
overall evaluation of the economic
performances of African continent and of
SSA in particular has not been impressive
over the period under study. Evidence from
available data showed that the socio- economic conditions in the continent were
not encouraging. Nigeria, being one of the
top three countries that consistently received
Page 3 of 74
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
e-ISSN: 2395-0463
Volume 02 Issue 8
August 2016
Available online:http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 93
FDI in the last decade is not exempted from
this category (Ayanwale, 2007).
The SSA countries are putting so much
effort into attracting foreign investors and
yet the economy is still dwindling in terms
of economic growth. The reason attributed
to this fact goes beyond the major
determinants of FDI. This concern is
exacerbated by the conclusion of Asiedu
(2002) that what constitutes the drivers of
FDI in other developing regions do not
necessarily match well with the case of SSA
countries. Zeng et al. (2002) also find that
policies that have been successful in other
regions may not be so in Africa. They
demonstrate that a higher return on
investment and better infrastructure have a
positive impact on FDI to non-SSA
countries, but have no significant impact on
FDI in SSA countries.
The percentage share of Asia in the global
flow has been the highest and on a relatively
increasing trend. In 2007, despite the
economic crisis, Asia recorded about 20 per
cent of the global share of FDI. American
and the Caribbean economies became the
second highest beneficiary of FDI inflow
into the region. Europe’s share was
relatively lesser than that of America and
slightly higher than that of Africa. Available
data show that Africa has constantly been at
the bottom of the ladder of regions that had
benefited from the share of global FDI flow
as it has constantly recorded about 5 per cent
of Asians’ share (UNCTAD, 2010).
Several studies have argued that the non
performance of FDI in enhancing growth
can be linked to the inability of government
to develop their financial markets (e.g.
Alfaro et al, 2009; Levine et al, 2000;
Hermes and Lensink, 2003; Cattaneo 2011)
as the financial position of a country plays a
crucial role in the growth of an economy1
.
Studies like Kabalyk (2009), Zadeh and
Madini (2012), Azman-Sain et al (2010) all
1
For example, if the same amount of FDI is prevailing
in two economies, holding all other factors constant,
financially well-developed economy will generate
three times additional growth as compare to
financially weak economy (Cattaneo 2011).
