History Of Impact Of Foreign Direct Investment

Published Date: 02 Nov 2017

The purpose of this paper is to test the impact of foreign direct investment (FDI) on economic growth in North African countries using the recent growth theory and econometrics technique; theoretically the most of the recent economic research consider the foreign direct investment one of the important factors of growth in many region, i examine the hypothesis on north African countries and the results showed that the FDI inflows impact on economic growth in north Africa countries is not statistically very significant and that FDI inflows to the region doesn’t achieve the desired result.

During the last decades north African countries adopted many economic reform policies to keep in pace with the rise of global growth, one of the policies was in form of supporting and welcoming foreign companies to attract foreign direct investment in order to spur economy growth, this policies had started earlier in Tunisia and morocco and later in Algeria [1] 

On a study on central and eastern Europe (CEE) and the middle east and north Africa (MENA) Darrat, A. F., et al. (2005) found that fdi has a significant effect only on EU accession contries and no effect or negative effect in non EU accession and MENA countries

Despite the many empirical studies on the impact of FDI on growth in developing countries, sub-Saharan Africa there is a very limit articles on FDI effect on growth in Middle East and North Africa region,

The question is does FDI inflows causes a change in economy growth in northern African countries? To answer this question I use a panel data analysis from 1980 to 2011 on the six north African countries Algeria, Egypt, Libya, Morocco, Sudan, and Tunisia,

The United Nation Conference on Trade and Development define foreign direct investment (FDI) as "an investment involving a long-term relationship and reflecting a lasting interest in and control by a resident entity in one economy (foreign direct investor or parent enterprise) of an enterprise resident in a different economy (FDI enterprise or affiliate enterprise or foreign affiliate). Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates" [2] 

Literary many studies acknowledge the advantages of FDI on economic growth, beside other few studies showed a negative effect of FDI on economic growth

Table 1: Empirical literatures

Author (s)

Year

Findings

De Mello, L. R

1999

Time series and panel data study on period from 1970 to 1990, showed that fdi effect on growth depends on the relation between foreign and domestic investment

Carkovic, M

2002

Dynamic panel data study on 72 countries during a period from 1960 to 1995 the results viewed the positive impact on growth

Lyroudi, K.

2004

empirical Bayesian analysis on the US and the western European countries the results showed that FDI does not exhibit any significant relationship with economic growth for the transition countries

Andreas, J

2006

The study covered 90 countries from 1980 to 2002, the result shows a positive effect of FDI on growth in developing countries while the effect was negative on developed countries

Anita H and Ferda H

2006

tested the impact of FDI on growth in 140 country across the world they found a positive and significant results

Ilan Noy

2007

examine the role of inward FDI on Indonesia economic growth from 1997 to 2007 and the results showed a negative effect,

Aviral Tiwari, et al.

2011

u sing a panel model Study during the period 1986-2008 on 23 Asian countries found that FDI and exports enhance economic growth

Abdulhamid Sukar

2011

Beside trade openness macroeconomic policies, FDI has a significant effect on economic growth, the Study from 1975-1999 in sub-Saharan African countries

Najia Saqib, et al.

2013

maintain that Pakistan’s economic performance is negatively affected by foreign investment while its domestic investment has benefitted its economy, Moreover, the nation’s debt, trade and inflation have found to have negative impact on its GDP as well.

Data and Empirical estimation:

The data for the six countries complied from the world bank and united nation conference on trade and development,

I used the fixed effect model to investigate the relationship between FDI and economic growth on panel data of six countries during a period from 1980 to 2011

The estimation model based on the production function developed by Jawaid, S. T et al, 2012, Specified as follows:

I run a fixed and random effect tests

the tables below shows the fixed and random effect model result

The empirical result shows that the entire variable except inflation has the expected sign,

- Relationship between FDI and the dependant variable GDPGR; in the two model I observe that the estimated coefficient of FDI is positive which mean FDI is supporting the economy growth In all the ix countries

- Trade openness has a positive coefficient as well exhibited a positive effect on economic growth as well,

- Effect of inflation expected to be negative but the inflation coefficient is positive too which determine that inflation has a can be a useful tool for the policy makers to spur economic growth

Although FE Adjusted R-squared= 0128, RER-squared= 0123 which indicate that the results isn’t too significant

:

In conclusion, the foreign direct investment inflows spurs economic growth, in this study I had applied the fixed and Random effect test which is suitable test for as this kind of study across 6 countries during a period of 31 years,

The north African countries during the last three decades experienced a growth and decline cycle as in many developing economies in addition the current circumstance this countries is facing harm the economy growth and affect negatively the foreign direct flow to the region,

Beside still left some determent of economic growth which hold a large effective part of economic growth in north Africa as political stability, infrastructure, Education, and oil price which play a very significant role on both importer and exporter countries economic growth