The Asymmetric Effects of Foreign Direct Investment Inflow on Economic Growth: Fresh Evidence from Somalia

Abstract

Purposes: Although there has been some progress since the 2012 establishment of the Federal Government Somalia, Foreign direct investment is the one of critical engines in economic growth. The latest value of foreign direct investment for 2021 was 5.97% of GDP, comparison of previous years to 2020 was 6.74% of GDP in Somalia. This paper aims to investigate the asymmetric effects of foreign direct investment (FDI) inflow on economic growth in Somalia from 1977-2021. In addition to FDI, inflation, gross capital formation, and trade openness are used as control variables to examine their influence on economic growth. Design/Methodology/approach: This research employs the nonlinear autoregressive distributed lag (NARDL) technique. Finding: The findings reveal that a positive shock in FDI positively influences Somalia's economic growth, while a negative FDI has a negative impact. The Wald test establishes the asymmetric effect of FDI on economic growth in both the short and long run. Moreover, trade openness and inflation rate significantly reduce the pace of economic growth in both the long and short run. However, gross capital formation only boosts economic growth in the long run. Research limitations/ implications: although Somali faced a lot of challenges including civil war, terrorists, macroeconomics instability, poor infrastructure, and corruptions are not considered owing to data availability. Policy implications: firstly, increase revenue through tax reforms and anti-corruption measures. Secondly, initiatives policies that help public finance investments and reduce trade barriers. Finally, maintain macroeconomic stability of inflation, and exchange rates, can help reduce the negative impact on economic growth improve the investment climate and Somalia’s image abroad.