Essays on Foreign Direct Investment in Sub-Saharan Africa

Abstract

This thesis comprises of five chapters with three empirical papers on essays on foreign direct investment (FDI) in SSA. The first empirical paper investigates the geographical determinants of FDI, while controlling for resources, market, efficiency and institutional factors in Sub-Saharan African (SSA) from 2002 to 2016. To achieve this objective, a panel data consisting of a sample of 40 SSA countries was estimated using Hausman-Taylor estimation technique. To check for the robustness of the results the sample was split into South and East, and West and Central SSA countries and further into regional and resource rich and non-resource rich countries. The estimation results indicate that the coefficient of geographical area in Km2 is positive in the full sample and the subgroups. The coefficient of location in tropics exerts a positive and significant effect on FDI in the full sample while the coeficient of distance from the sea is negative and significant in the full sample and the West and Central SSA countries. With regard to geographical variables, regional analysis shows that the results obtained in the West and Central subgroup is influenced by countries in Central Africa and the results in the South and East subgroup is mainly propelled by countries in Southern Africa. The coefficient of market size (per capita GDP) is positive and significant in the South and East SSA countries confirming the market seeking hypothesis. For resource seeking variables, the coefficient of natural resource rent is significant in South and East African countries. In addition, the coefficient of investment in infrastructure measured by fixed telephone subscription is positive and significant in the full sample and the West and Central SSA countries. Geographical size of the country was found to attract FDI in both resource rich and resource poor countries. However, greater distance to the sea was found to limit FDI flows in resource rich countries but exert no effect in resource poor countries. The study

recommends that SSA countries should take advantage of their geographical size to come out with a common market to maximize the potential in FDI. The second paper examines the effect of FDI and absorptive capacities on economic growth for 36 Sub-Saharan Africa (SSA) countries spanning the period 1998 to 2016.The hypothesis is that for FDI to propel growth, adequate absorptive capacities such as financial market development that accounts for fragility, and economic freedom should be present in the host country. A key point of departure from other studies is that while our financial market data accounts for market fragility, our economic freedom data also uses the overall score of all indicators of economic freedom. Using the Fully Modified Ordinary Least Squares (FMOLS) technique, the results indicate that FDI promotes economic growth in the presence of adequate host country’s absorptive capacities in the full sample. However, in the absence of these absorptive capacities, FDI could retard economic growth. Moreover, FDI promotes growth in middle income and resource rich countries but hurts growth in low income countries and exert a negative but insignificant effect in resource poor countries in SSA. Thus, efforts should be geared towards the recognition and building of adequate absorptive capacities that can convert the spillover effect of FDI into tangible growth. The third paper examines the differential effects of sector level FDI on carbon dioxide emissions in SSA from 1990 to 2016. Using system GMM estimation technique, the results show that FDI in agriculture and services reduce carbon dioxide emissions whereas FDI in industry pollutes the environment. However, the coefficients of the value added from the various sectors exert no significant effect on carbon dioxide emission. Domestic investment exerts a negative effect in the services sector whereas financial market development exerts a positive effect in the services sector but both exert no effect in agriculture and industrial sectors. The coefficient of urbanization was found to be positive and significant in agriculture and industrial sectors. Finally, an inverted U-shaped Environmental Kuznet Curve (EKC) was found in the industrial sector while in agriculture and service a U-shaped EKC was found. The study recommends the formulation and implementation of sound economic policies towards attracting more FDI into agriculture and service sectors so as to gain from the advantages associated with transfers of cleaner technology. Furthermore, policy makers should be more circumspect and concentrate more on revising their environmental laws regarding investments in industry.