Infrastructure and the Impact of Foreign Direct Investment (FDI) on Export Diversification: Evidence from Africa

Abstract

Abstract Since independence, most African countries have sought to achieve economic transformation. Export diversification (ED) has been a crucial instrument toward that goal. To attain this ED objective, governments have adopted several strategies, including tax exemptions and the removal of trade restrictions, intended to attract foreign direct investment (FDI). I hypothesize in this article that the impact of FDI on ED is contingent on the complementary infrastructure available in the host country. Greater availability of infrastructure would attract more ED-enhancing FDI. Using a five-year 1971–2010 panel data on 29 African countries, I estimate a dynamic model involving the usual covariates of the ED equation, including infrastructure and additionally FDI. The estimating methodologies are the generalized least squares (GLS) and the two-step System Generalized Methods of Moments (SYS-GMM). The results indicate that the higher the level of infrastructure, as indicated by the usual measure involving telephone availability, the larger is the positive FDI effect on ED. This is in addition to the favorable independent effect of infrastructure. The findings suggest that, in order for African countries to attract the ED-enhancing FDI type, such infrastructure should be appropriately prioritized.