Abstract
Foreign direct investment has been identified as one of the most important external sources of finance in achieving and funding Sustainable Development Goals and Agenda 2063. This is because of its ability to supplement domestic investment, boost savings, and increase employment. Foreign direct investment is also capable of promoting long-term growth and development through technology and knowledge spillover from foreign enterprises to domestic agents in the host countries. With these benefits in mind, this thesis examines how sub-Saharan African countries can leverage their host absorptive capacity to enhance the beneficial impact of FDI on welfare, particularly in low-income African countries with weak domestic financial markets. With the exception of the first, second, and last chapters, which contain the general introduction, theoretical review, and conclusions, with policy recommendations, this study consists of four empirical, self-contained, and standalone essays. The first essay (Chapter 3) examines how human capital and institutional quality can mediate the impact of foreign direct investment on welfare. The chapter uses a panel of 30 sub-Saharan African countries from 1996-2018, using fixed-effect instrumental regression and a dynamic panel threshold model. The empirical findings suggest that foreign direct investment’s impact on the incidence and intensity of poverty in the region is not direct; rather, it is contingent on the absorptive capacity of the local economy. The study further reveals that foreign direct investment will alleviate poverty conditions if it interacts with human capital and institutional quality at a given threshold.
The second essay (Chapter 4) examines the impact of infrastructure and institutional quality on the nexus between foreign direct investment and inclusive human development. In achieving this, a panel of 28 sub-Saharan African countries from 1996-2018 was explored using the panel smooth transition regression model. The empirical results indicate that the impact of foreign direct investment on inclusive human development is conditional on host variables like infrastructure and institutional quality. The study further supports the view that institutional quality and infrastructure are germane in enhancing the impact of foreign direct investment on welfare distribution. This implies that the more sub-Saharan African countries improve the conditions of their economies, the more they unlock the benefits of foreign direct investment in terms of job creation, technological spillovers, and welfare improvement.
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The third essay (Chapter 5) examines the impact of spatial interdependence/third-country effects on multi-national enterprises’ location choice. In achieving this, a panel of 33 sub-Saharan African countries from 1996-2018 was explored using a spatial econometric model. The results lend support to the substitution effect of foreign direct investment in the region i.e., foreign direct investment flows to a particular host country substitute those that go into other host countries in the region. The results further suggest that the motive of multi-national enterprises is characterized by export-platform. In addition to the evidence of spatial interconnectedness across countries in sub-Saharan Africa, the study’s empirical findings lend support for both direct and spillover effects of the foreign direct investment determinants in the region. This indicates that the foreign direct investment promotional policies of neighbouring countries influence the ability of a host country to attract foreign direct investment. We recommend that the host economy should consider the surrounding country characteristics in their foreign direct investment policy formulation.
The fourth essay (Chapter 6) investigates the impact of sovereign credit ratings on foreign direct investment inflow of 20 sub-Saharan African countries. In achieving this, the study uses a fixed effects model, fixed effects instrumental variable regression, and the bootstrap panel Granger causality test. There are three main important findings from this empirical study: (1) sovereign credit ratings have a significant and positive impact on foreign direct investment inflows in the region; this result is robust to sub-regional analysis, the instrumental regression model, and an alternative measure of credit rating; (2) the impact of SCR on FDI increases after the global financial crises (GFC), and (3) there is a unidirectional causality running from sovereign credit ratings to foreign direct investment in sub-Saharan Africa. In increasing foreign investors' appetite, this study recommends that sub-Saharan African countries get rated, and the countries rated should put in place appropriate policies to get better ratings.
JEL classification: F23; I30; E24; E02; H54; O43; C31; F12; F30; G15
Keywords: Foreign direct investment, Absorptive capacity, Instrumental regression, Dynamic panel threshold model, Inclusive human development, Panel smoothening transition regression model, Third-country effect, Spatial econometrics, Export platform, Sovereign credit ratings, Global financial crises, and sub-Saharan African countries.