Essays on the Effects of Foreign Direct Investment on Economic Growth and Welfare: The Case of Sub-Saharan Africa

Abstract

This study examines the impact of foreign direct investment (FDI) flows on economic growth and welfare in Sub-Saharan Africa (SSA). Following the growing consensus among scholars that the effects of FDI on growth in developing countries depends on domestic factors in the host countries, the first part of this study examines the role of four domestic factors - human capital, financial development, institutions and infrastructure - in facilitating the effects of FDI on growth in 44 SSA countries for the period 1981-2010. Using a dynamic panel growth model, and the two-step system GMM estimation of Blundell and Bond (1998) and Arellano and Bover (1995), this study finds mixed results regarding the impact of domestic factors on the relationship between FDI and growth in SSA. The study finds evidence to show financial sector and institutional development serves to enhance effects of FDI on growth in the SSA. However, contrary to Borensztein et al. (1998), this study finds that human capital development has a negative impact on the FDI-growth nexus, and the same holds for infrastructural development. These results are robust to other factors that affect growth in SSA. Abstract The second part of this study explores the impact of FDI flows on economic welfare in SSA. The study tests the hypothesis that FDI flows to SSA improves economic welfare in the region. Given the high levels welfare inequality in the region both across and within countries, this study seeks to investigate the impact of FDI flows across different levels of welfare. Using quantile regression (QR) estimation techniques for 47 SSA countries covering the period 1990-2011, this study finds that the impact FDI flows on welfare depends on the level of welfare already attained. The results show that increased FDI improves economic welfare for those countries in the higher welfare quantiles while the impact on countries in the middle to lower quantiles is either negative or insignificant. The results are robust to several other factors that known to affect economic welfare.