Sustaining Economic Growth in Sub-Saharan Africa: Do FDI Inflows and External Debt Count?

Udi Joshua,Samuel Asumadu Sarkodie,David Babatunde

doi:10.3390/jrfm14040146

Udi Joshua, Samuel Asumadu Sarkodie + Show 1 more

Open Access

https://doi.org/10.3390/jrfm14040146

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Abstract

The quest for the attainment of economic development is sought after by all global economies, which by effect is expected to transcend to improving livelihoods and standard of living. However, several factors hinder the process of achieving sustained economic development, especially in developing countries. In this regard, assessing the extent of economic expansion orchestrated by foreign direct investment (FDI) inflows in vulnerable economies such as Sub-Saharan Africa (SSA), particularly in the face of the significant fall in global FDI inflow, is worthwhile. In essence, this study ascertains the impact of FDI inflows and external debt on economic growth amidst decline in FDI inflows and excessive foreign borrowings. The mixed order of integration from the stationarity test underpins the adoption of autoregressive distributed lag (ARDL) approach for data covering the period 1990 to 2018. The empirical results found FDI inflows play a crucial role in achieving economic expansion in the region. On average, FDI inflows, external debt, and foreign aids are more useful in expanding the economy compared to trade openness and exchange rate. Thus, this study recommends the need for SSA to open its economic borders for external capital, viz. FDI. A peaceful economic and political environment is a pre-condition to attract and maintain potential foreign investors. Stability in exchange rates is critical in achieving growth in FDI and other foreign resources. However, caution is required, especially in administration of external resources. Particularly, contracting external debt must strictly be driven by economic reasons rather than political motivation. Borrowed funds could be injected mainly into productive streams with the highest investment returns to boost economic development.

Highlights

It is on record that the 2015 global economic recession heavily affected vulnerable economies including Sub-Saharan Africa, as many foreign investors withdrew their investment from the region
We examined the geographical distribution of the data series across Sub-Saharan
It can be observed that South Africa has the highest average economic growth of about US$0.32 trillion, followed closely by Nigeria of about US$0.27 trillion

Summary

Introduction

It is on record that the 2015 global economic recession heavily affected vulnerable economies including Sub-Saharan Africa, as many foreign investors withdrew their investment from the region. This action was presumed to be in connection with the fall in investment profit and global oil shock for oil-producing economies like Nigeria, Angola, Gabon, and Egypt (UNCTAD 2018). According to United Nations Conference on Trade and Development (UNCTAD 2018), FDI inflows in 2017 stood at $US38 billion, increasing to $US40 billion in 2018, spreading disproportionately across the region. The natural resources dominated economies, such as Nigeria and Angola, suffered more serious setbacks in FDI inflows than diversified economies including Egypt and South Africa, which witnessed stable increase in FDI inflows. UNCTAD (2018), further reveals that the Northern sub-region registered growth in FDI inflows from $US13.4 billion in 2017 to $US13.9 billion in 2018

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Conclusion