Analysis of net trade, FDI and GDP growth using cointegration, VECM, Granger causality and a regression approach: A case study of Sub Saharan African region

Abstract

Net trade and Foreign Direct Investment (FDI) are both important factors of economic growth and development in Sub Saharan African (SSA) region. Many different studies have shown the impact of trade and FDI in economy growth in SSA countries. However, few is known about the effect in SSA region in overall. To use these factors in policy making and development planning, the following questions need to be addressed. As both factors impact the economy growth, can net trade (NT) historical performance be used to forecast FDI? Is there any short-run or long-run relationship effect among GDP growth, FDI and net trade? This paper has implemented the cointegration methodology to analyze the impact of net trade and FDI on GDP growth, used the Vector Error Correction Model (VECM) for long-run and short-run relationship effect, an Ordinary Least Square (OLS) regression to determine the significant impact of FDI and net trade on GDP growth and finally the granger causality test. This study shows a positive long-run relationship effect of FDI on GDP. The positive short-run effect of both FDI and net trade is also detected on GDP growth. The regression result shows that net trade has a significant impact on GDP growth and finally from the Granger causality test, the study shows that net trade Grangercause FDI.