On the simultaneous openness hypothesis: FDI, trade and TFP dynamics in Sub-Saharan Africa

Simplice A Asongu,Joseph Nnanna,Paul N Acha-Anyi

doi:10.1186/s40008-020-0189-4

Abstract

This study assesses the simultaneous openness hypothesis that trade modulates foreign direct investment (FDI) to induce positive net effects on total factor productivity (TFP) dynamics. Twenty-five countries in Sub-Saharan Africa and data for the period 1980 to 2014 are used. The empirical evidence is based on the Generalized Method of Moments. First, trade imports modulate FDI to overwhelmingly induce positive net effects on TFP, real TFP growth, welfare TFP and real welfare TFP. Second, with exceptions on TFP and welfare TFP where net effects are both positive and negative, trade exports modulate FDI to overwhelmingly induce positive net effects on real TFP growth and welfare real TFP. In summary, the tested hypothesis is valid for the most part. Policy implications are discussed.

Highlights

1 Introduction The objective of this research is to assess the relevance of trade dynamics in moderating the effect of foreign investment on productivity dynamics in Sub-Saharan Africa
The problem statement underlying this exposition is motivated within the broader context of: (i) debates in the contemporary literature on the relevance of total factor productivity (TFP) and (ii) gaps in the attendant literature
(ii) Cross-country variations are acknowledged in the estimation exercise because the data structure is panel-oriented. (iii) The issue of endogeneity that is imperative for a robust empirical analysis is taken on board from two main premises, notably: simultaneity or reverse causality is addressed by the adoption of internal instruments and the time invariant omitted indicators are employed to take into account the unobserved heterogeneity

Summary

Introduction

The study is tailored within the context of a simultaneous hypothesis such that foreign direct investment (FDI) is complemented with dynamics of trade to influence productivity. The problem statement underlying this exposition is motivated within the broader context of: (i) debates in the contemporary literature on the relevance of total factor productivity (TFP) and (ii) gaps in the attendant literature. These motivational elements are expanded in the following passages. While a strand of studies posits that aggregate productivity is essential in boosting economic development, authors are still divided on the mechanisms through which productivity can be boosted (Elu and Price 2010; Baliamoune 2009; Baliamoune-Lutz 2011; Asongu 2013; Asongu 2014a; Ssozi and Asongu et al Economic Structures (2020) 9:5

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Conclusion