The Nexus Between Foreign Direct Investment and Economic Growth in Africa: The Case of China's FDI (Essay Sample)

The Nexus Between Foreign Direct Investment and Economic Growth in Africa: The Case of China's FDI
Abstract
This study aimed to investigate Chinese-FDI-economic-growth nexus in selected African countries based on panel data. Using the fixed effect regression model, the empirical effects of FDI from China on selected African countries were analyzed. The results indicated a 0.508% GDP growth in response to a 1% increase in FDI from China to African countries. Inelastic and unidirectional relationships were identified between the selected countries' GDP growth and FDI from China. The results highlight the importance of stimulating FDI in developing African countries through incentives such as eliminating bottlenecks in obtaining business permits, low tariffs on intermediate goods and inputs, and business visas for foreign investors.
1 Chapter 1: Introduction
1.1 Background
Most countries in Africa have developing economies, characterized by poor economic growth, low-income levels, high unemployment rates, and low GDP. Ironically, most of them are in a position to exploit their abundant natural resources and turn around their economies. Ozuzu and Isukul (2021) proposed FDI as a tool to spark economic growth and development. FDI proponents argue that it is crucial to provide the requisite technical skills and capital to exploit abundant natural resources in African countries. The poor economic performance in African countries is attributable to poor political leadership and instability, limited technology, and inadequate capital. Therefore, multilateral organizations and economists argue for increasing GDP growth through FDI.
Foreign direct investment in African countries is associated with creating employment opportunities, enhancing technological skills and bolstering domestic production. Kurtishi-Kasrati (2013) that economic development is related positively to foreign direct investment. Multinational organizations (MNEs) are typically the primary drivers of FDI. The government's efforts to attract them may lead to political reforms such as democratic electoral processes and effective management of government administration. However, MNEs' profit motives may be inconsistent with governments' economic and social development reasons for seeking FDI.
The conflict between MNEs and government interests when it comes to FDI raises concerns over potential adverse effects on developing economies. Such concerns relate to crowding out local industries and repatriating profits to home countries with limited benefits to the host country. Cuervo-Cazurra et al. (2021) highlighted the potential for technologically advanced multinationals to steal domestic companies' market share, leading to the latter's failure. This secondary research examined the FDI-GDP-growth nexus in select African economies. It explored the modulating effects of other variables such as population growth, interest rate spread, and internet technology penetration.
1.2 Overview of the Research Problem and Solution
Foreign direct investment increases the available production capital and may trigger economic growth in a country. Conversely, it may lead to negative effects such as pollution and repatriation to home countries. Asafo-Agyei and Kodongo's (2022) research suggests that variables such as financial systems and human capital modulate a country's capacity to absorb FDI. Most previous studies focus on Africa in general or other places in Asia and South America. However, there is a paucity of research investigating these variables in the context of Southern Africa. This study aimed to investigate Chinese-FDI-economic-growth nexus in selected African countries based on panel data the UNCTAD and the World Bank Development indicators. It also sought to identify the role of other modulating variables with the FDI-GDP nexus. Focusing on specific African countries is vital for strategic decision-making regarding economic development agendas and investment policies. Moreover, it is vital to explore FDI's full potential for increased economic growth and domestic production.
1.3 Aims and Research Hypothesis
This study investigated the FDI-Economic growth nexus, focusing on specific African countries' receiving inflows from China. Previous studies highlight the potential for both positive and negative effects. Therefore, investing in the relationship is crucial to determining the net impact based on quantitative research methodologies. Moreover, other variables such as financial systems and human capital modulate FDI's effects on the receiving country. This study aimed to investigate the role of such variables on FDI absorption. It sought to provide information that can form the basis for policy decisions that maximize the FDI's potential. The following research questions and hypotheses were formulated based on the research aims.
1 RQ1: Is there a relationship between FDI and some African countries' economic growth?
H1: FDI positively impacts some African countries' economic growth.
2 RQ2: What are the mediating effects of other variables on FDI absorption in African counties?
H2: Other variables facilitate FDI absorption in African counties
1.4 Research Purpose
The "developing countries" classification is synonymous with poor economic and social development. This is ironic given the favourable climate conditions, fertile soils and abundance of natural resources African countries can exploit to spur growth and improve livelihoods. However, capital and technological skills are key prerequisites for exploiting available resources in developing countries. FDI is meant to bridge the gap with multilateral organizations and MNEs acting as intermediaries. From the previous discussions, conflicting interests between host countries and MNEs' profit motives may complicate efforts to bridge the gap. In some cases, FDI has potential negative effects including crowding out domestic enterprises and repatriating profits to foreign countries. The implication is that the flow of FDI into a country does not necessarily translate to positive economic outcomes. Therefore, scientific inquiry is required to investigate FDI-Economic growth nexus, focusing on specific African countries' receiving inflows from China. The results of this study are crucial in crafting policies that exploit FDIs' full potential.
2 Chapter 2: Literature Review
This section examines the FDI-Economic growth nexus based on previous research findings. It also focuses on the mediating variable modulating FDI-economic growth relationship
2.1 FDI – Economic Growth Relationship
Examining the FDI – economic growth relationship based on neoclassical economic growth theory suggests a positive correlation between an exogenous FDI increase, the level of capital per capita, and GDP growth. Tanaya and Suyanto (2022) argue that exogenous variables such as labour growth and technological development modulate FDI's impact on economic growth rate in the long run. The implication is that the positive effects of FDI on economic growth are contingent on long-term technological development. Therefore, FDI's influence on technology transfer translates to positive spill-over effects.
Previous empirical studies have analyzed the FDI – economic growth relationship. The results have been mixed, with the results pointing to both positive and negative impacts. For instance, Sarker and Khan's (2020) FDI-GDP model found both positive and neutral results in the absence of other modulating variables. The implication is that FDI may bolster the recipient country's economic growth since it increases available capital, enhances technology transfer and creates job opportunities. However, attracting FDI depends on improved human capital and expanded market size.
Studies also indicate a feedback relationship between FDI and economic growth. According to Abbes et al. (2015), the two variables are positively interdependent, especially under high growth rate conditions. The latter drives the demand for FDI, creating profit-making opportunities and the cycle continues. Conversely, the results may be neutral, suggesting the FDI – Economic growth relationship is insignificant.
2.2 China's FDIs in Africa
Previous research suggests both positive and negative relationships between economic growth and FDI inflows in Africa. Gui-Diby's (2016) review of annual panel data between 1980 and 2009 yielded positive outcomes in the receiving countries. However, Herzer's (2010) results indicated a negative FDI-Economic growth relationship in developing economies. The study also found significant disparities in FDI growth effects. Studies on such disparities suggest limited or negligible FDI-related economic growth.
Studies on the nexus between FDI, technological development and productivity suggest have found weak, insignificant, or negative FDI-influenced economic productivity. Malikane and Chitambara (2017) investigated this relationship using the Generalized Methods of Moments (GMM) approach. The result indicated questionable outcomes or little effects in the host country. These findings are consistent with aggregate studies on the same subject whose results have been inconclusive. Some studies report negative FDI effects on economic growth while others report insignificant or no effect, despite other conditioning variables.
Although some research shows negative, inconclusive or neutral FDI-related effects on African countries' economic growth, others have found positive correlations. For instance, Chege's (2015) research in Kenya suggests a strong positive correlation between FDI and economic growth. Similarly, Sakyi a...