Is the causal relation between foreign direct investment, trade, and economic growth complement or substitute? The case of African countries

• Author: Ada Chigozie Akadiri,Seyi Saint Akadiri,Mojibola Bamidele‐Sadiq,Hasan Gungor
• DOI: http://doi.org/10.1002/pa.2023
• Published date: 01 May 2020
• Date: 01 May 2020

ACADEMIC PAPER

Is the causal relation between foreign direct investment, trade,

and economic growth complement or substitute? The case of

African countries

Ada Chigozie Akadiri

1

| Hasan Gungor

1

| Seyi Saint Akadiri

2

|

Mojibola Bamidele-Sadiq

2

1

Department of Economics, Institute of

Graduate Studies and Research Faculty of

Business and Economics, Eastern

Mediterranean University, Famagusta, Turkey

2

College of Business, Westcliff University,

Irvine, California, USA

Correspondence

Seyi Saint Akadiri, College of Business,

Westcliff University, Irvine, CA 16715, USA.

Email: s.akadiri.186@westcliff.edu

This study examines causal nexus between foreign direct investment (FDI) and eco-

nomic growth for 25 African countries within a model that also takes into consider-

ation trade openness using more recent panel data set over the period 1980–2018.

We used panel bootstrapping cointegration techniques that account for cross-

sectional dependence to test whether there is a long-run cointegration relationship or

not. The Granger causality approach is employed to conduct predictive analysis

among the panel series. Our findings indicate the presence of a long-run equilibrium

nexus between the variables, and we found a bidirectional causality between foreign

direct investment, trade openness, and economic growth. This study provides an

insight for governments and policymakers in this region to restructure FDI and trade

policies in such a way that its positive spillover would spread across the rural areas

and local firms, thereby leading to an all-inclusive sustainable economic growth and

development of African countries in the long run.

JEL CLASSIFICATION

C23; F21; F23; O55

1|INTRODUCTION

Recently, the role of foreign direct investment (FDI) and trade open-

ness on economic growth of the host countries has gained growing

attention among researchers and policymakers (see Adams, 2009;

Akinlo, 2004; Asiedu, 2006; Awokuse, 2008; Bengoa & Sanchez-

Robles, 2003; Buckley, Clegg, Wang, & Cross, 2002; Choe, 2003;

Dupasquier & Osakwe, 2006; Durham, 2004; Li & Liu, 2005; Menyah,

Nazlioglu, & Wolde-Rufael, 2014; Nair-Reichert & Weinhold, 2001;

Yucel, 2009). Several scholars in the field have investigated the role

and impacts of FDI and/or trade openness on economic growth for

different regions and countries, such as Morocco (Haddad & Harrison,

1993), Thailand (Jansen, 1995), Cameroon (Kang & Mbea, 2011), Nige-

ria (Akinlo, 2004), South Africa (Fedderke & Romm, 2006), Africa

(Kandiero & Chitiga, 2006), Sub-Saharan Africa (Adams, 2009), Ghana

(Sackey, Compah-Keyeke, & Nsoah, 2012), and Rwanda (Ocaya &

Kaberuka, 2013) via time series, qualitative, and panel (cross-country)

analyses.

This study revisits the literature by focusing on the long-run

cointegration movement and dynamic causality nexus between FDI,

trade openness, and economic growth, via second-generation panel

methodology for selected countries in Africa. The gap emanating from

the existing literatures is generated by the inability to unfold the pos-

sible existence of short-run or long-run FDI and trade liberalization

influence on economic growth. It will be unproductive to examine the

determinants and role or impact of FDI through trade liberalization on

the economic growth of African countries without putting into consid-

eration the duration and direction of causality of their relationships.

Consequently, this study aims to address this gap in literature as well

as provide new insight by sampling selected African countries.

According to the United Nations Conference on Trade and Devel-

opment (1996), the conceptual models of international trade and FDI

Received: 17 August 2019 Revised: 30 August 2019 Accepted: 3 September 2019

DOI: 10.1002/pa.2023

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