The Role of FDI on Structural Transformation among Sub-Saharan African and EAP Countries Using a Panel Data Approach

Abstract

In recent decades the activities of multinational corporations have increased across the globe substantially having a massive flows of foreign direct investment. This paper empirically examines the role of FDI on structural transformation among Sub-Saharan African and EAP Countries Using a Panel Data Approach. To achieve the objective the study took 31 years panel data . The study used descriptive analysis and empirical methods of analysis. The panel Autoregressive Distributed Lag model with error correction models of Pooled Mean Group technique were employed after checking the possible assumptions of our economic series. The results of Im-Pesaran-Shin test confirms our economic series are stationary at level and first difference forms. Pedroni’s cointegration tests suggests the existence of co-integration between the variables. According to the descriptive analysis, on average structural transformation index (STI) is the highest for China (30.52%) followed by South Korea (25.86), while Ethiopia (4.85) is having the lowest. On other hand, the East Asian and Pacific (EAP) countries in the higher income category are performing better than Sub-Saharan African countries. In addition,Sub-Saharan Africa countries are by far having low level of FDI inflows as compared to EAP countries. Particularly, the FDI inflows for EAP countries in the higher income category is around USD 52 Billion, and while for low and middle income category SSA countries it accounts around USD 2.2 Billion and USD 85 million, respectively. More specifically, across countries in the panel the FDI inflow is the highest for China while on average Kenya is having the lowest FDI inflows. On the other hand, according to the ARDL model of Pooled Mean Group estimation technique in the long-run financial development indicator and FDI have positive impact on the structural transformation index of nations at 1percent level of significance for the full sample in the panel. Moreover, pooled mean group regression result among the Sub-Saharan African and EAP countries FDI has a significant but having different sign for the two group in predicting structural transformation. Particularly, for EAP countries FDI has a negative effect in the long run and a positive effect in the short-run on structural transformation index which are also statistically significant. While for Sub-Saharan African countries FDI has a positive and statistically significant effect on structural transformation both in the long run and short-run. Finally, the government of developing countries like SSAs should provide different incentive packages to attract FDI inflows, among others.