Foreign Direct Investment in Sub-Sahara Africa.

Abstract

This research examines the current and potential role of inward Foreign Direct Investment (FDI) in the economic development of Sub-Saharan Africa (SSA). It is motivated by the recent rise of inward FDI from both developed and developing countries into SSA, considering the attendant impact of foreign ownership on the performance of domestic firms. The study has four main objectives. The first objective is to critically review the relationship between FDI and economic development in SSA. The second objective is to identify macroeconomic determinants of inward FDI in SSA. The third objective will be to examine the effect of foreign ownership on the economic performance of firms in SSA. The fourth objective will investigate how GVC participation affects inward FDI in South Africa. To achieve the first two objectives, empirical literature of inward FDI and its impact on economic development in developing economies was reviewed, identifying the factors that inform an investors' decision to invest in a firm or country. Although determinants of inward FDI have been widely investigated in the literature without any consensus, WHI leads to the second objective and that is to review it within the context of Dunnings-OLI of why do Multinational Corporations (MNCs) choose to invest the way they do? This research provides a review of both theoretical and empirical studies that identify the most significant determining factors that elucidate the geographical spread and examine the determinants of FDI in SSA using data spanning over 15 years (i.e., 2004 to 2018) for 47 SSA countries. The study employs pooled OLS, fixed and random effects estimators, and the system-GMM on data sourced from World Development Indicators (WDI). The findings of the study reveal that GDP growth rate, internet subscription, foreign exchange, human capital development, trade openness and government effectiveness are the drivers of FDI in the region. While labour force and mobile telecom subscription, exchange rate, inflation, and political stability hurt FDI in the region. Exchange rate, inflation, and political stability, on the other hand, have a negative but insignificant impact on FDI. To achieve the third objective, the researcher did a review of the theoretical and empirical studies of the impact of foreign ownership on selected domestic firms. Firm-level data of the World Bank Enterprise Survey (WES) was employed to analyse productivity, profitability, and export propensity in 11,965 firms across 39 SSA countries using the Least Square Dummy Variable (LSDV) and Propensity Score Matching (PSM) techniques. In the findings, domestic firms with any degree of foreign ownership were 44 per cent more productive and 52 per cent more profitable than their domestic counterparts. Furthermore, foreign-owned firms had an export propensity of between 8 to 11 times more than their domestic counterparts. To achieve the fourth objective, pooled OLS, fixed (double panel), and the GMM estimator were employed on a sample of selected sectors in South Africa for 5 years (2010-2014). The researcher also utilised data sourced from UNCTAD, ISC088, QLFS, QES and the Department of Statistics South Africa to ascertain the influence of inward FDI in the participation and positioning of South Africa in the Global Value Chain. The findings show that an increase in efficiency, a component of the value chain, is vital to an increase in inward FDI. This efficiency is due to skilled (high or moderate) labour and technology located in South Africa.