Essays on the impact of foreign direct investment in African economies

Chitambara, Prosper
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This thesis focusses on the impact of Foreign Direct Investment (FDI) on economic performance in selected African countries over the period 1980-2012. The thesis is divided into five chapters and three of them are empirical. Chapter 1 is the introduction. Chapters 2, 3 and 4 are empirical chapters examining the impact of FDI on various indicators of economic performance. Chapter 5 concludes by giving policy recommendations. In chapter 1 we provide a background, motivation, objectives, hypothesis to be tested, gaps in the literature, contributions of the study and the main findings. Chapter 2 examines the link between FDI and domestic investment and the role of host country factors namely financial development, institutional development and trade openness. We use the ordinary least squares, random effects, fixed effects and the system GMM methodologies on a panel of 48 African countries over the period 1980 to 2012. The results show that FDI has a crowding out effect on domestic investment and that improved institutions and trade openness do mitigate the substitutionary effect of FDI on domestic investment. This implies a need to come up with policies to improve local conditions by strengthening institutional quality and enhancing trade openness. Chapter 3 investigates the impact of FDI on productivity growth and the role of relative backwardness (the technology gap) on a panel of 45 African countries over the period 1980-2012. We use two measures of relative backwardness namely: the distance from technological frontier and the income gap. We apply the fixed effects, random effects and system GMM method to account for the issues of endogeneity. The results show a general insignificant effect of FDI on TFP growth. This suggests that FDI has a limited effect on productivity growth. The analysis of the advantage of relative backwardness does not support the convergence theory of Findlay (1978) and Wang and Blomstrom (1992). The large technology gaps in African countries hinder their ability to absorb foreign technologies from advanced countries. Chapter 4 analyses the long run dynamic relationship between FDI, exports, imports and profit outflows in 47 African countries over the period 1980-2012 by means of panel cointegration techniques. The results from the panel cointegration tests show that a long run relationship exists between the variables. Our findings provide evidence on the adverse long run effects of FDI on the current account in African economies. In particular, the results show that, FDI inflows lead to a decrease in exports and an increase in both imports and profit remittances. These findings confirm that indeed profit outflows by multinational companies are one of the main factors driving current account deficits in African countries. Chapter 5 is the conclusion. We provide a key summary of the key issues covered, the main findings, the key contributions of the study and the policy recommendations. We also suggest areas for further research in the future.
A dissertation submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, in fulfilment of the Requirements for the Degree of Doctor of Philosophy 19 August 2015
Chitambara, Prosper (2016) Essays on the impact of foreign direct investment in African economies, University of the Witwatersrand, Johannesburg, <>