Impact of the Foreign Direct Investment on Economic Growth in Benin: A Cointegration Analysis

Abstract

The role of Foreign Direct Investment (FDI) on the growth of countries under developmental transformation is a subject of vast empirical research. In some major research studies, the relationship between FDI and growth is positive although there is no clear understanding of this relationship. Meanwhile, in other research works the relationship is rather negative. So, in short, the relationship between FDI and growth doesn’t appear lucid. .Thus, mitigated findings on studies carried out can be applied to different countries based on their individual specific issues or situations that are camouflaging the clarity of the role FDI plays in their growth.

This research work is therefore to examine the case of Benin between the period of 1970 and 2002. This period is considered for the research because, taking into account the interdependence of FDI and growth of a country based on previous research works, we chose a model in a form of a simultaneous equation system that is tested by two-Stages Least Square (SLS) method. This is then used to analyze the impact of the FDI on the growth rate of the real GDP of Benin. We arrive at the conclusion that FDI positively and meaningfully affects the growth rate, and that it is more efficient than domestic investment. In that regard the human capital and the degree of opening-up the economy don’t play a major role as a catalyst for the growth of the country. Since their interaction with FDI has a positive effect but has no major meaningful effect on growth rate of Benin.

Keywords: Foreign Direct Investment (FDI), Economic Growth, Cointegration, Benin.