Foreign Direct Investment and Economic Development: Evidence from Selected African Countries

Africa unlike other developing regions of the world has experienced declining flows of foreign direct investment (FDI), despite the apparently high investment returns rates. As FDI flows, it is expected that existing gaps of productive factors are gradually closed and dependence on foreign capital is reduced. These increases in domestic savings, investment, skills and technology bring about economic development. The study examined the declining flow of FDI to the African regions as well as the impact that it has in relation to the domestic sector investment and economic development of the region. It also analysed the impact of FDI flows on economic development of countries with both lower income per capita and low inflow of foreign funds. In addition, it examined the impact of rate of return of investment in relation to the flow of FDI and the impact of FDI in relation to closing investment and foreign exchange gaps. The study made use of pooled data from thirty nine African countries within the period 1993 and 2012.The method of analysis utilized for the study was the fixed effect least-square dummy variable model, employed to estimate the impact of foreign direct investment on economic development for the host African countries, and the lowess smoother non-parametric analysis to estimate the impact of FDI in relation to closing gaps of investment and foreign exchange. The study finds that foreign direct investment is statistically significant in relation to economic development for host African countries. It also finds that FDI is significant in relation to economic development in African sub-regions that accessed lower flow of foreign funds. This lower flow was the probable reason for lesser dependence on foreign capital which resulted in conscious development of the domestic sector investment, thereby resulting into increased economic activities and therefore economic development. It was again determined from the analysis that the apparently high rate of return on investment has no positive effect on FDI inflow and the inflow of FDI has not closed the investment and foreign exchange gaps of the host African countries. Also from the study, it is deduced that FDI is significant on economic development for African countries with lower income per capita. The study recommends that the government of host countries should consider closely the sectors that FDI flows into, encourage domestic investment in such sectors, and reduce dependence on FDI flows as income increases. Also concerted effort is to be made to gradually close the gaps of productive factors by increasing domestic investment, increasing investment into research and development to improve skill with technology, encourage exports, reduce imports and encourage a sustainable environment