Abstract
The purpose of this study is to empirically examine the dynamic impact of the stock of foreign direct investment (FDI) inflows on the aggregate income of The Gambia. In order to find the dynamic nexus, the ARDL model was used to capture both short-run and the long-run impact of FDI inflows. The result shows that FDI has a negative impact on income in the short-run. The bounds testing for cointegration showed that there is a long-run level relationship between income and FDI inflows, and the impact of FDI inflows on income in the long-run is positive. In order to examine the possible reason why FDI inflows have a different impact in the short-run and the long-run, the study empirically investigates how the interaction of FDI inflows and domestic investment affects income. The results showed that in the short-run FDI inflows crowded-out domestic investment and this led to FDI inflows to have a negative impact on income in the short-run. Moreover, the results also showed that in the long-run the FDI inflows complemented domestic investment and this led to FDI inflows to have a positive impact on aggregate income in the long-run. The conclusion drawn from this study is that the net impact of FDI inflows on the aggregate income of The Gambia depends on the degree of complementarity and substitution between FDI inflows and domestic investment.
Highlights
It is due to growth models putting emphasize on the importance of capital accumulation and technological progress in determining the income of a country that most governments and its policy makers find ways to increase domestic savings so that it can be channeled to domestic investment [1]
To ensure that none of the variables was integrated above I (1), ADF test was carried out at first difference and the result is presented in Table 3, and the results show that none of the variables is integrated above I (1) regardless of which model is used so the condition of bounds testing was met
The empirical results have shown that the impact of foreign direct investment (FDI) inflows in The Gambia depends on the time horizon, short-run or long-run
Summary
It is due to growth models putting emphasize on the importance of capital accumulation and technological progress in determining the income of a country that most governments and its policy makers find ways to increase domestic savings so that it can be channeled to domestic investment [1]. Sometimes domestic savings are not enough; the government and its policy makers make policies to attract foreign direct investment (FDI). These changes in national policies to attract FDI are carried out due to the notion among a lot of academics and policy makers that FDI is a source of economic growth and development in a host country through the transfer of physical capital and technology [2]. Ref [4] has stated that the impact of FDI on the host country’s income depends on the interaction between FDI and the domestic investment. From the theoretical literature, FDI inflows alone cannot have an impact on the host country income; certain internal conditions must be in place before a host country can derive a maximum benefit from FDI inflows
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