The Causality between Foreign Direct Investment and Economic Growth in Botswana: A Multivariate Analysis

Erasmus L Owusu

doi:10.22158/jetmm.v1n1p8

Abstract

The paper empirically investigates the short and long-run causal relationship between foreign direct investment, credit to the private sector, trade openness, gross national expenditure and economic growth in Botswana. In doing this, the paper employs multivariate Granger-Causality within an ARDL-bounds approach to co-integration and unrestricted error correction model (UECM). The paper finds that FDI inflow does not spur economic growth but rather, it is economic growth which promotes FDI inflow, credit to the private sector, trade and national expenditure. However, the paper finds a bi-directional relationship between FDI inflow and credit to the private sector both in the short and the long runs. Thus, policies should be targeted at improving the investment climate for existing domestic and foreign investors through infrastructure development and that external capital inflow should be complemented by domestic savings and investors on other to boost economic growth in Botswana.

Highlights

In a liberalised and competitive world where every country is striving to grow its economy in order to improve the living standard of the nationals, the question is? What are the main factors which cause economic growth in a given country? The discourse regarding the relationship between foreign direct investment (FDI), credit to the private sector (CPS), trade openness (TO), gross national expenditure (GNE) and economic growth has attracted a vast amount of literature from both theoretical and empirical perspective in recent years more so for the relationship between FDI and economic growth
A number of studies have been conducted on the causal relationship between foreign direct investment and economic growth in sub-Saharan African countries very few of them have considered the comprehensive relationship between foreign direct investments, credit to the private sector, trade openness, gross national expenditure and economic growth in order to establish the actual causes of economic growth
The results indicate that there exists a uni-directional causality from economic growth, credit to the private sector, FDI inflow and trade to government expenditure as well as uni-directional causality from economic growth to credit to the private sector, FDI inflow and national expenditure both in the short and long runs

Summary

Introduction

The discourse regarding the relationship between foreign direct investment (FDI), credit to the private sector (CPS), trade openness (TO), gross national expenditure (GNE) and economic growth has attracted a vast amount of literature from both theoretical and empirical perspective in recent years more so for the relationship between FDI and economic growth. A number of studies have been conducted on the causal relationship between foreign direct investment and economic growth in sub-Saharan African countries very few of them have considered the comprehensive relationship between foreign direct investments, credit to the private sector, trade openness, gross national expenditure and economic growth in order to establish the actual causes of economic growth. This paper uses the recently developed ARDL-bounds testing approach in a comprehensive multivariate setting to examine the causal relationship between foreign direct investment, credit to the private sector, trade openness, gross national expenditure and economic growth in Botswana from 1975 to 2016.

Objectives

Methods

Findings

Conclusion