Foreign Direct Investment And Welfare: Evidence From Sub-Saharan Africa

Abstract

Developing countries all over the world have come to realize the importance of FDI as an important source of economic growth and invariably welfare improvement. This is because it supplements domestic investment and brings positive spillover effects which are vital in economic development. As a result, developing countries including countries in SSA are now pursuing economic policies explicitly intended to improve conditions to attract FDI and to maximize its benefits. This study empirically examines the direct and indirect (through economic growth) relationship between FDI and welfare improvement in SSA. It is based on data collected from the World development indicators, UNDP, and Freedom house, for 38 Sub-Saharan African countries covering the period 1990-2013. The study employs panel data estimation techniques in estimating the model. Taking unobserved country heterogeneity and endogeneity of the FDI variable into account, and correcting for serial correlation and heteroskedasticity, the findings were that FDI directly exerts positive impact on welfare improvement in SSA. However, there was no enough evidence to conclude on FDI’s transitional impact (through growth effects) on welfare in SSA. The study therefore indicates the need for Sub-Saharan African countries to adopt policies that will attract more FDI inflows into their respective countries in order to benefit from its presence.