Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis

Nearly all developing countries actively seek capital and technology from the advanced countries. Although private direct foreign investment (mainly in the form of multinational enterprise) is viewed with ambivalence by many developing countries, it is nonetheless true that direct investment remains a substantial source of capital and is sometimes the only source of specific technologies. Indeed, given the slow growth in official external assistance, developing countries are becoming more, not less, dependent on direct foreign investment. While disbursements of official development assistance by the OECD countries rose 43% from 1961 through 1970, direct investment flows rose almost 90% over the same period. In the later year, the flow of direct investment was more than two-fifths of all official assistance, $3.2 billion compared to $7.8 billion.1 Furthermore, the United States and other major capital exporting countries would prefer, for economic as well as ideological reasons, to channel more of their capital outflows to developing countries through private investment. It is highly probable, therefore, that developing countries will continue to rely on direct foreign investment in the foreseeable future to carry out their development programs. It is against this background that the present study seeks to identify the empirical determinants of direct foreign-investment flows in the manufacturing sectors of developing countries. Our purpose is to select from the many economic, social, and political features of a developing country those features that are critical to making that country attractive or unattractive to private foreign investors. Available empirical studies are limited

The long run trade orientation of an economy is measured in this article by an index which measures the extent to which the real exchange rate is distorted away from its free trade level by the trade regime. The technique for estimating a cross country index of real exchange rate distortion uses the international comparison of prices prepared by Robert Summers and Alan Heston. Resource endowment constitutes the norm and real overvaluation or undervaluation relative to this norm reveals whether incentives are directed to the domestic or international market. The index is constructed based on data for GDP/capita average price level in US dollars 1976-85 and GDP growth rate/capita 1976-85. Other sections are devoted the comparison of the procedure for 117 countries between 1976-85 and an examination of the empirical relationship between outward orientation and economic growth and sensitivity analysis. The results indicate that Latin America generally was overvalued by 33% relative to Asia and Africa was overvalued by 86%. The real exchange rate distortion index supports the view that Asian countries are more outward oriented. Asian economies have lower price levels which reflect relatively modest protection and incentives oriented to external markets. Latin American countries with moderately high price level and African countries with very high price levels reflect strong protection and incentives directed to production for the domestic market. An alternative specification which eliminates the dummy variables for Africa yields similar results with slightly lower magnitude; i.e. overvaluation is 60% instead of 86% for Africa and Latin America is overvalued by 39% instead of 33% over Asia. A table is provided which indicates by country the distortion and variability of the real exchange rate the GDP growth the 1976 GDP/capita and the investment rate. Another finding was that there is a significant negative relationship between distortion of the real exchange rate and growth of GDP/capita after controlling for the effects of real exchange rate variability and investment level with both the original specification and the alternative. The growth rate/capita of Latin American and African countries would increase 1.5-2.1% with a shift to move outward oriented trade policies. This gain as well as devaluation of the real exchange reate trade liberalization and maintenance of a stable real exchange rate would contribute to positive growth rates. In the analysis of the poorest 24 countries the result was that only rate distortion and not variability and investment rate explained the growth rate. The gain for Ghana for example of adopting the trade policies and exchange rate of Bangladesh would be 5% to its growth.

Does foreign investment crowd in domestic investment? Evidence from Vietnam

Abstract. This paper analyzes the causal effect between domestic private investment, public investment, foreign direct investment and economic growth in Tanzania during the 1970-2014 period. The modified neo-classical growth model is used to estimate the effect of investment on economic growth. Also, the economic growth models based on Phetsavong & Ichihashi ( 2012 ), and Le & Suruga ( 2005 ) are used to estimate the crowding out effect of public investment on domestic private investment on one hand and foreign direct investment on the other hand. In the same way, the crowding out effect of foreign direct investment on domestic private investment is estimated. A correlation test is applied to check the correlation among independent variables, and the results show that there is very low correlation suggesting that multicollinearity is not a serious problem. Moreover, the diagnostic tests including RESET regression errors specification test, Breusch-Godfrey serial correlation LM test, Jacque-Bera-normality test and white heteroskedasticity test reveal that the model has no signs of misspecification and that, the residuals are serially uncorrelated, normally distributed and homoskedastic. Broadly, the empirical results show that the domestic private investment and foreign direct investment play an important role in economic growth in Tanzania. Besides, a revealed negative, albeit weak, association between public and private investment suggests that the positive effect of domestic private investment on economic growth becomes smaller when public investment-to-GDP ratio exceeds 8-10 percent. Similarly, foreign direct investment tends to marginally reduce the impact of domestic private investment on growth. These results suggest that public investment and foreign direct investment need to be considered carefully in order to avoid a reduced positive impact of domestic private investment on growth. Domestic saving may be promoted to encourage domestic investment for economic growth. Keywords. Public investment, Domestic private investment, FDI, Crowding out effect, Economic growth. JEL. F21, F43, O40, O47 .

Previous articleNext article No AccessMacro Policies, External Forces, and Economic Growth in Sub-Saharan AfricaDhaneshwar GhuraDhaneshwar Ghura Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Economic Development and Cultural Change Volume 43, Number 4Jul., 1995 Article DOIhttps://doi.org/10.1086/452185 Views: 48Total views on this site Citations: 31Citations are reported from Crossref Copyright 1995 The University of ChicagoPDF download Crossref reports the following articles citing this article:Fekadu Mekonnen Bedhiye, Lakhwinder Singh Fiscal policy and private investment in developing economies: Evidence from Ethiopia, African Journal of Science, Technology, Innovation and Development 4 (Jan 2022): 1–15.https://doi.org/10.1080/20421338.2021.1982664Roberta Bajrami, Adelina Gashi, Kosovare Ukshini, Donat Rexha Impact of the government size on economic growth in the Western Balkan countries, Journal of Governance and Regulation 11, no.11 (Jan 2022): 55–63.https://doi.org/10.22495/jgrv11i1art6JIUN-NAN PAN, MING-LEI CHANG POPULATION AGING, MIDDLE-INCOME TRAP, AND ECONOMIC GROWTH: AN EMPIRICAL STUDY OF ASIAN ECONOMIES, The Singapore Economic Review 66, no.0606 (Apr 2019): 1577–1594.https://doi.org/10.1142/S0217590818420092Sin-Yu Ho, Bernard Njindan Iyke The Determinants of Economic Growth in Ghana: New Empirical Evidence, Global Business Review 21, no.33 (Jul 2018): 626–644.https://doi.org/10.1177/0972150918779282Temidayo Gabriel Apata Public spending mechanisms and gross domestic product (GDP) growth in the agricultural sector (1970–2016): Lessons for Nigeria from agricultural policy progressions in China, Bulletin of Geography. 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In view of a macroeconomic context characterized by the revival of economic growth and the vision of having a better Togo in 2030, we have witnessed in recent years a major campaign to promote both domestic and foreign direct investment. Given the theoretical ambiguity of the relationship between these different types of investments, we offer in this paper an empirical validation of the interactions within the triptych FDI - public investment - domestic private investment. Estimates using a VECM showed that long-run private investment has a ripple effect on both foreign direct investment and public investment, which conversely also have a positive influence on domestic private investment. In addition, there is no significant relationship between public investment and FDI. Regarding the short term, there is a training of public investment in the previous period effect on FDI while domestic private investment tends to oust. Finally, an increase in FDI stimulates in the short term, both public and domestic private investment. Key words: Foreign direct investment, public investment, private investment, VECM, Togo.

It is widely recognized that trade and foreign direct investment (FDI) inflows are important factors in long-term economic growth. Trade openness enhances skills through the adoption of imported superior production technology and innovative processes, and thus exerts a positive and significant impact on economic growth. Similarly, FDI augments and stimulates domestic investment, enhances technology transfer, increases export capacity and foreign exchange earnings, and thus promotes capital formation and long-run growth. This paper examined the empirical relationship between economic growth on one hand and trade and FDI flows on the other hand for Saudi Arabia during the last four decades (1970-2010). The autoregressive distributed lag (ARDL) methods to cointegration and the associated error correction model (ECM) are adopted. The results suggest that human capital, government expenditure, trade openness and infrastructure are important determinants of long run growth in Saudi Arabia. In contrast, FDI together with domestic private investment has impacted negatively on real gross domestic product (GDP). This is attributed partly to the dominant role of the public sector in the economy emanating from the huge oil resources, thereby leaving little room for the domestic and foreign private investment to play their role in the economy, and partly to the concentration of FDI in unproductive sectors. Nonetheless, the interaction of FDI either with government expenditure or with domestic investment could impact positively on growth. Efforts should therefore focus on enhancing the integration between these factors on long-term growth. Privatization, economic liberalization, and diversification measures are expected to provide real opportunities for domestic and foreign investment to play an important role in economic activity and growth. Key words: Saudi Arabia, FDI, unit roots, ARDL cointegration, ECM, trade.

This study is a novel attempt to explore the relationship among private domestic investment, FDI and public investment in India. The Johansen cointegration test indicates the cointegrating relationship between the variables of interest during the time period 1978 and 2014. The VECM shows that both FDI and public investment have crowded in private domestic investment in the long-run. Public investment crowds in domestic private investment in the short-run also but FDI tends to crowd out domestic investment in the short-run. The short-run negative relationship between FDI and PDI may be attributed to the fear of intensive competition, pre-emptive and brownfield investment by the foreign investors. But in the long-run, as the vertical linkages are established between FDI-backed firms and domestic ones, FDI inflows also crowd in domestic investment. The error correction term is found highly significant with the expected negative sign implying speedy convergence to long-run equilibrium after a shock. The dummy variable that has been introduced to capture the impact of reforms in the aftermath of 1991 bears a statistically significant and positive sign. Which implies that reforms of 1991 have positively influenced PDI. The causality test shows that there exists bi-directional causality between private domestic investment and public investment but unidirectional causality between FDI and PDI running from FDI to PDI.

Investment Growth after the Pandemic

Globally, investments in physical and human capital have been identified to foster real economic growth and development in any economy. Investments, which could be domestic or foreign, have been established in the literature as either complements or substitutes in varying scenarios. While domestic investments bring about endogenous growth processes, foreign investment, though may be exogenous to growth, has been identified to bring about productivity and ecological spillovers. In view of these competing–conflicting perspectives, this chapter, examines the differential impacts of domestic and foreign investments on green growth in Nigeria during the period 1970–2017. The empirical evidence is based on Auto-regressive Distributed Lag (ARDL) and Granger causality estimates. Also, the study articulates the prospects for growth sustainability via domestic or foreign investments in Nigeria. The results show that domestic investment increases CO2 emissions in the short run while foreign investment decreases CO2 emissions in the long run. When the dataset is decomposed into three sub-samples in the light of cycles of investments within the trend analysis, findings of the third sub-sample (i.e. 2001–2017) reveal that both types of investments decrease CO2 emissions in the long run while only domestic investment has a negative effect on CO2 emissions in the short run. This study therefore concludes that as short-run distortions even out in the long-run, FDI and domestic investments has prospects for sustainable development in Nigeria through green growth.

Globally, investments in physical and human capital have been identified to foster real economic growth and development in any economy. Investments, which could be domestic or foreign, have been established in the literature as either complements or substitutes in varying scenarios. While domestic investments bring about endogenous growth processes, foreign investment, though may be exogenous to growth, has been identified to bring about productivity and ecological spillovers. In view of these competing–conflicting perspectives, this chapter examines the differential impacts of domestic and foreign investments on green growth in Nigeria during the period 1970-2017. The empirical evidence is based on Auto-regressive Distributed Lag (ARDL) and Granger causality estimates. Also, the study articulates the prospects for growth sustainability via domestic or foreign investments in Nigeria. The results show that domestic investment increases CO2 emissions in the short run while foreign investment decreases CO2 emissions in the long run. When the dataset is decomposed into three sub-samples in the light of cycles of investments within the trend analysis, findings of the third sub-sample (i.e. 2001-2017) reveal that both types of investments decrease CO2 emissions in the long run while only domestic investment has a negative effect on CO2 emissions in the short run. This study therefore concludes that as short-run distortions even out in the long-run, FDI and domestic investments has prospects for sustainable development in Nigeria through green growth.

Financial development and private investment in Sub-Saharan Africa

The intended purpose of this study was to investigate the contribution, constraints, trends and determinants of private domestic investment in Ethiopia by taking annual data set of 34 years spanning from 1987-2021. The objective was achieved by collecting secondary data. Accordingly, domestics private investment has contributed a lot for the growth of the national economic despite the constrains. The domestic private investment in Ethiopia has faced severe trend due to trends in economics system in the country, i.e., pre-1974, 1974-1991 and Post 1991. The determining factors in this study included private investment, foreign direct investment, inflation rate, access to credit, GDP per capita, lending interest rate, human capital, exchange rate, public investment, taxation and political stability. Accordingly, GDP per-capital, political stability, public investment and lending interest rate have significant positive long run effect on private investment, while human capital and exchange rate have negative long run effect. Public investment and political stability have positive significant effect while lending interest rate and exchange rate have negative significant effect in the short run. Finally, expansion of infrastructure, increasing income generation mechanism for citizens, appreciation of domestic currency and creating fertile investment climate are some of the recommendations forwarded.

This paper investigates the relationship between FDI and private investment in Sub-Saharan Africa (SSA), using a sample of 40 countries over 1980-2017. To disentangle short term from long-term dynamics, our empirical analysis is based on Pooled Mean Group (PMG), Mean Group (MG) and Dynamic Full Effects (DFE) models. We find that FDI has little effect on private investment in the short run but significant crowding-in effects in the long-run: a one percentage point increase of the share of FDI in GDP leads to a 0.29% rise in private investment, in the long run. Our results also show that FDI interacts with public domestic investment to boost these positive effects. Finally, we show that the impact of FDI on domestic private investment is stronger in non-natural resource exporting diversified countries as opposed to non-diversified commodity exporters.

Developing countries have continued to experience an unprecedented increase in direct foreign investment (FDI) inflows for the past two decades. However, the quantitative impact of the same on private domestic investment (PDI) is still imprecise. Using a system GMM approach and panel data from Sub-Saharan Africa (SSA) for the period 1996–2013, we provide evidence in support of the crowding out role of FDI on PDI but the observed nexus is precipitated by the presence of liberalization, human capital development and institutional quality. Interestingly, when we consider the latter variables uninteracted, the improvement of each appears to significantly benefit PDI. In addition, the substitution role of FDI in PDI appears to be stronger in resource-rich than in the resource-poor countries. Additionally, we find that public investment crowds out private investment whereas infrastructure development, past private investment, credit depth, and GDP per capita are supportive of the PDI. However, we document mixed evidence for sub-samples of the East African Community, the Southern Africa Development Corporation, the Economic Community and West African States, and the Economic Community of Central African States. Overall, our study underscores the urgent need for well-directed policies in line with improving institutions, school enrolment, financial systems, infrastructure, and the government prioritization of productive investment that is supportive of the private as well as foreign sector. We advocate for reviews of incentive packages to foreign firms that discourage fair competition if the PDI-FDI complementarity and consequential positive spillovers to other sectors are to be realized for economic development in SSA.