Abstract
This study assesses the short-term and long-term impact of Foreign Direct Investment (FDI) on the manufacturing sector output in Sierra Leone using time series from 1970 to 2018. In order to assess the impact of FDI together with some explanatory variables such as inflation, movement of exchange rates, external debt and exports; the Vector Auto Regression (VAR) method was applied. It first tests for unit root using both the Augmented Dickey-fuller (ADF) and the Philip Perron (PP) tests. The results from the granger causality test imply that the foreign direct investment (FDI) greatly influences the manufacturing output (MQ, which also implies that, an increase in FDI will result to increase in MQ. There is also significant relationship between MQ, inflation and exchange rate (ER). Additionally, there is no directional relationship between external debt (DET) and export (XPT) with MQ. This implies that MQ cannot granger cause DET and XPT individually but it can granger cause them all in totality. The study also employed the Johansen cointegration method in order to derive the long-run relationship of the variables. The results from the empirical findings identified that there is positive relationship between the FDI and the manufacturing sector, while inflation and export reported a negative relationship with FDI. The error correction model (ECM) was also used to test for the short run relationship of the variables and reported that exchange rate and FDI availability are the main determinants of manufacturing sector output in Sierra Leone. The study did not find external debt, export and inflation to be significant with the manufacturing sector output in the short run. The study concluded that it is important for the Sierra Leone government to take into account the paramount role of FDI and also improve the business environment by creating an investment destination that is safe and friendly. This required government to formulate policies that are bias free and create a business environment that can inspire investors greatly. This calls for government to strengthen the implementation of reforms which will improve the country’s gross domestic product (GDP), while embarking on severe infrastructural development and curbing inflation via strengthening monetary policy.
Highlights
Introductionforeign direct investment (FDI) is absorbed as an important element in their strategy for economic development
The Vector Auto Regression (VAR) is used to assess the impact of foreign direct investment (FDI) on the manufacturing Sector output of Sierra Leone and the Augmented Dickey-Fuller (ADF) and the Philip Perron (PP) test of stationarity was carried out as a result of the unit root properties presence, which is usually related with time series data
The paper aimed at assessing the impact of FDI on the manufacturing sector output in Sierra Leone, the regression results show that, FDI have an influence on the manufacturing sector output as far as the F-test is concerned; this has to do with the overall test for significance
Summary
FDI is absorbed as an important element in their strategy for economic development. This is probably due to the fact that FDI is seen as a consolidation of technology, capital, marketing and management. According to [1] Oluchukwu, et al, one of the most uninteresting features of present day’s globalization drive is mindful reassurance of cross boarder investments, more especially by multinationals corporations (MNC). The global economy is witnessing an incredible upsurge in FDI since the beginning of 21st century to present and attracts most analysts’ attention. That is the reason why a good number of policy makers viewed FDI as a major impetus to economic growth in both developing and developed countries [2]
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