Foreign Direct Investment(FDI),Quality Of Institutions And Economic Growth:Evidence From African Economies

The relationship between foreign direct investment(FDI),quality of institutions and economic growth has been an area of interest for many policy makers,economists and academicians for the long time.This is because FDI can affect many macroeconomic variables of recipient countries.Moreover,FDI regarded as the most special device through which countries can secure their economies due to its capacity to accumulate capital,transfer technology,generate new knowledge and innovations,induce managerial expertise and skills,promotes production,encourage exports,as well as creates job opportunities.These benefits have induced a very healthy picture that led to a strong perception that,FDI is a bundle of resource for elevating economic growth of developing countries particularly African countries.Therefore,most of the African countries offer a heartfelt attitude through endowment of incentivized policies to foreign firms that are usually associated with FDI.Although many studies have carried out in this particular area,to date,there is no consensus regarding FDI-growth nexus.Further,irrespective of the potential FDI inflows and the benefits it generates,its economic growth impact is still unclear among African countries.In view of the above,therefore,our primary objective is to empirically quantify the effect of interaction between FDI inflows and quality of institutions on economic growth,in the essence of examining the absorptive capacity effect of quality of institutions on economic growth impact of FDI inflows.This area has not been explored in the existing empirical studies especially in the context of African countries.Additionally,we examine the absorptive capacity effect of human capital on economic growth impact of FDI inflows,as well as the individual impact of FDI inflows,quality of institutions,human capital and trade openness on economic growth.Using Generalized Method of Moments(difference-GMM)estimator in a dynamic panel data of 49 African countries between 1990 and 2017,we find that FDI has a significantly negative contribution on economic growth.However,after interaction with human capital and quality of institutions variables of corruption control,government effectiveness,political stability and voice and accountability,the interaction terms show positive contribution on economic growth.This implies that the impact of FDI on economic growth of African countries is not automatic but rather depends on the absorptive capacities of human capital and quality of institutions as specified.The positive statistically significant contribution of interaction term of FDI and human capital implies that human capital is a fundamental tool for exploitation of FDI spillovers towards economic growth of African countries.Nevertheless,interaction terms of FDI and quality of institutions variables of regulatory quality and rule of law provide negative support on economic growth.Moreover,human capital and quality of institution variables of corruption control,regulatory quality and rule of law individually exert negative support while government effectiveness,political stability,voice and accountability exert positive support on economic growth.Additionally,trade openness show positive statistically insignificant contribution on economic growth implying that there is some degree of ‘crowding out' of domestic firms as well as trade deficit effect.The findings of our study have significance implication for African policy makers and governments.Therefore,in order to realize economic growth from FDI inflows,they have to stabilize institutions(quality institutions)with vibrant policies and regulations that can appropriately synergy domestic resources to generate and accumulate adequate number of human capital through improving education system,subsidies on research and development activities along with improvement of health sector.Moreover,they should have quality institutions that support private sector development,infrastructure development,as well as improve political environment and accountability of leaders.Just to mention few.Further,they should limit FDI in primary sectors while promoting FDI in secondary sectors.They should have a well-managed trade openness that encourage global value chain and exportation of value-added products in order to reduce trade deficit and ‘crowding out' of the domestic firms.Therefore,if the above recommendations are fully implemented without any political influence and in subject with the context of a particular country,economic growth impact of FDI inflows certainly would be uplifted hence sustainable economic growth and development.