Be good to thy neighbours: A spatial analysis of foreign direct investment and economic growth in sub‐Saharan Africa

Abstract

AbstractThis paper employs a spatial dependency framework to examine intermediary roles played by trade, institutional quality and natural resource endowment in determining direct and indirect (spillover) effects of inbound foreign direct investment (FDI) on economic growth. We develop a number of spatial mechanisms to assess how these intermediary factors limit and/or enhance the effect of FDI on economic growth. In particular, we test whether different levels of resource rents, severity of civil conflict and openness to international trade are statistically different in attenuating direct and indirect (spillover) effects of inbound FDI on growth. Last, we conduct a test of asymmetry to investigate whether the effect of FDI on growth is statistically different from zero in three democratic (autocratic) regimes, that is, low democratic (high autocratic), moderate democratic–autocratic and high democratic (low autocratic) societies. A number of insightful contributions to the economic growth‐FDI literature can be extracted from our analyses. First, results indicate that inbound FDIs on their own have positive and significant effect on economic growth. However, the positive FDI effect on growth is significantly dampened by the negative intermediary role of civil conflict. Second, we find that, the more opened sub‐Saharan African economies are to international trade, the greater is the impact of FDI on growth. However, trade among African countries as a share of their economies plays insignificant intermediation role on direct and indirect effects of FDI on growth. Third, we find that an increase in resource rents as a share of the economy significantly reduces direct and spillover effects of inbound FDI on economic growth. Last, our analysis indicates that both low democratic (high autocratic) and high democratic (low autocratic) regimes do accelerate the positive impact of FDI on growth. However, results indicate a slow‐down effect of FDI on growth under moderate democratic–autocratic regimes. This particular finding suggests that the intermediary role of democracy in determining the effect of FDI on economic growth is non‐linear. A number of policy implications can be extrapolated from our analysis. Most importantly, trade policies, which boost integration of sub‐Saharan African countries and open up the continent to the rest of the world, are likely to play major intermediation roles in accelerating the positive effect of FDI on growth.