Re-examine foreign direct investment and economic growth: Panel co-integration and causality tests for sub-Saharan African countries

Abstract

This study examines the causal relationship between foreign direct investment and economic growth in sub-Saharan Africa from the period 1995–2011. The study uses annual data for a panel of 30 sub-Saharan Africa Countries. We test for Granger causality in heterogeneous panels by testing first for Homogeneous Non-Causality and Homogeneous Causality hypotheses. The non-homogeneous test, which tests the hypothesis that gross domestic product (GDP) does not Granger-cause foreign direct investment and foreign direct investment does not Granger-cause GDP, is rejected, and it is also shown that there is bidirectional causality between economic growth and insurance in sub-Saharan Africa. The homogeneous causality tests, which test the hypothesis that GDP Granger-causes foreign direct investment and foreign direct investment Granger-causes GDP, are accepted. It is also shown that causality is homogeneous across all members of the panel.