Does Foreign Direct Investment Promote Exports? Evidence from African Countries

• Author: Abdoul G. Mijiyawa
• DOI: http://doi.org/10.1111/twec.12465
• Date: 01 September 2017
• Published date: 01 September 2017

Does Foreign Direct Investment Promote

Exports? Evidence from African Countries

Abdoul G. Mijiyawa

World Bank, Conakry, Guinea

1. INTRODUCTION

FOREIGN direct investment (FDI) can play an important role in host countries’ economic

development. FDI not only supplies capital financing, but can also be a source of tech-

nology and know-how transfer while fostering linkages between local and foreign firms. FDI

can increase productivity, thereby boosting the national economy. Based on these expected

positive effects of FDI, governments around the world offer incentives to attract FDI to their

countries. For instance, Head (1998) reports that, in 1994, the government of Alabama paid

the equivalent of US$150,000 per employee to get Mercedes Benz to locate a new plant in

Alabama. The British government provided an estimated US$30,000 per employee to attract

Samsung to the North East of England, and US$50,000 per employee to attract Siemens to

New Castle, in the late 1990s (Girma et al., 2001). In the same vein, UNCTAD (2000) run a

survey of tax incentive regimes in over 45 countries from all regions of the world and found

that nearly all countries surveyed offer incentives to attract FDI.

A relevant policy question to ask is whether all these incentives are worth it. One way to

answer this question is to look at the effect of FDI inflows on some economic performance

indicators of host countries. This is what this paper seeks to do, by examining the effect of

FDI on the exports of goods and services from Africa.

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Examining the effect of FDI on exports is very important, as increased exports can gener-

ate many benefits and contribute to host economies’ development. Higher exports can stimu-

late economic growth, which is necessary for poverty reduction. The experience of East Asian

countries that have chosen an export-led growth strategy is illustrative here. Higher exports

also generate higher labour productivity and higher total factor productivity because exporting

firms may become more productive due to increased competition with foreign firms. Techno-

logical spillovers that result from increased contact with firms and markets abroad can also

improve productivity. While stimulating productivity, higher exports should also support the

creation of well-paying jobs. For instance, it has been estimated that exports have supported

the creation of 11.3 million jobs in 2013 in the United States (US). Likewise, research shows

that workers in the US export-intensive manufacturing industries earn, on average, 18 per cent

more than their counterparts in other manufacturing industries (United States Department of

Commerce, 2014). Increased exports can also promote economic development by generating

foreign exchange earnings that countries can use to import machines and other capital goods

that they need to transform their economies.

Despite the aforementioned benefits of exports, Africa’s exports performance in terms of

global exports has been disappointing. Indeed, Africa’s share of global exports of goods and

services has declined from 5 per cent in 1970 to 3 per cent in 2014. Likewise, Africa’s shar e

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A better alternative would have been to compare the costs and benefits of FDI incentives. However,

this alternative approach would require more information, which is not available.

©2016 John Wiley & Sons Ltd

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The World Economy (2017)

doi: 10.1111/twec.12465

The World Economy

of global FDI inflows has declined from 9.5 per cent in 1970 to 4.4 per cent in 2014. While

Africa’s shares of global exports and FDI inflows have declined, those of developing econ-

omies have increased over time. The share of developing economies (excluding Africa) in

global exports has increased from 14 per cent in 1970 to 41.7 per cent in 2014. Likewise,

developing economies’ share of global FDI inflows has increased from 18.8 per cent in 1970

to 51 per cent in 2014.

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The aforementioned data highlight simultaneous increases in FDI inflows and exports of

goods and services in developing economies, suggesting a possible positive relationship

between the two variables. Thus, this paper examines whether FDI inflows can be a stimulat-

ing factor for Africa’s exports. This is a very important question given the important role of

exports in the process of economic development.

The paper contributes to evidence-based policymaking, by highlighting factors that can

contribute to the increase in Africa’s exports. More specifically, the paper brings two main

contributions to the literature. First, the paper uses the system-generalised method of moments

(GMM) technique with panel data, from 53 African countries over the period 1970–2009 to

estimate the effect of FDI inflows on the exports of goods and services. Second, the paper

finds that FDI has a positive and significant effect on exports in Africa, largely because of

FDI’s spillover effects on exports. As far as I know, this is the first paper to use panel data

covering a large sample of African countries to examine the effect of FDI on exports as well

as the mechanism by which FDI inflows affect exports.

The rest of the paper is organised as follows: Section 2 presents patterns of Africa’s

exports and FDI inflows, Section 3 reviews the existing empirical studies on the effect of FDI

on exports, Section 4 presents an overview of theoretical discussions on the link between FDI

and international trade, and Section 5 focuses on empirical investigations. The results of the

empirical analysis are discussed in Section 6, and Section 7 concludes the paper.

2. PATTERNS OF AFRICA’S EXPORTS AND FDI INFLOWS

a. Trends of Exports and FDI Inflows in Africa and Developing Economies

Figure 1 shows that since 1986, developing economies’ exports of goods and serv ices have

steadily increased and have been accelerating since 2004. Exports from Africa have been

accelerating too since 2004, but before that, Africa’s exports had fluctuated a lot compared to

developing economies’ exports. Both Africa’s and developing economies’ exports reached a

peak in 2008 before the outbreak of the global financial and economic crisis. Following the

2008 crisis, developing economies’ exports dropped by 19.6 per cent in 2009, but exports

from developing economies quickly rebounded in 2010, reaching a higher value than in 2008.

The dynamics of Africa’s exports was different from the one of developing economies in

the aftermath of the 2008 crisis. Between 2008 and 2009, Africa’s exports dropped by 30 per

cent (a higher exports drop than that of developing economies). Although rebounded in 2010,

Africa’s exports have not reached its 2008 value; this was not the case in developing econ-

omies. Africa’s exports have steadily increased between 2010 and 2012, but since 2013, Afri-

ca’s exports have been declining, reflecting difficult economic conditions in China and other

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The shares of global FDI inflows and exports for Africa and developing economies have been calcu-

lated based on data retrieved from UNCTAD databases.

©2016 John Wiley & Sons Ltd

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