Assessing the Impact of Foreign Direct Investment on Economic Growth in Sub-Saharan Africa: A Multi-Model Approach

Abstract

This study seeks to investigate the effect of foreign direct investment (FDI) on economic growth across a sample of African countries, utilizing a multi-model econometric approach, an exploratory literature review, and a descriptive empirical framework. This research distinguishes itself from prior studies in several key ways: (1) it is the first to analyze the relationship between economic growth in sub-Saharan Africa and a range of variables, including GDP, FDI, gross fixed capital formation, trade, labor, debt, government effectiveness, rule of law, control of corruption, political stability, absence of violence/terrorism, regulatory quality, and voice of accountability; (2) it incorporates the most recent data available; (3) it presents findings using stacked data; (4) it utilizes various proxies for factors influencing FDI; and (5) it employs a comprehensive econometric analysis with over a dozen unit root tests. The literature review was conducted using qualitative analysis, drawing from extensive databases. The study utilized secondary panel data spanning from 1996 to 2020 (24 years), sourced from the World Development Indicators. Quantitative analysis was performed using the Two-Stage Generalized Method of Moments (2SGMM) regression technique, alongside multiple tests. The findings indicate a positive impact of FDI on economic growth in sub-Saharan Africa. The results suggest that FDI not only contributes positively to economic development but also warrants promotion and encouragement. The study concludes by recommending that governments in developing countries create favorable conditions to attract FDI for their economic advancement.