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Foreign Direct Investment, Sectoral Effects and Economic Growth in Africa

Earlier studies on the impact of foreign direct investment (FDI) on economic growth have not been instructive largely on their failure to examine the sectoral transmission channels through which FDI affects overall growth. We re–examine the impact of FDI on economic growth in Africa relying on panel data from 38 African countries over the period 1960–2014. Results from the system generalised method of moments (GMM) reveal that, while FDI positively and unconditionally spurs economic growth, its growth–enhancing effect is imaginary when the conditional sectoral effects are introduced. On the channels of manifestation, we notice that the pass–through impact of FDI is only significant for the agricultural and service sectors and for most part, negative for the manufacturing sector albeit insignificantly. These findings are robust to model specifications. We discuss some key implications for policy.

Working paper 769
1 December 2018
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