The Long-Run Effect of FDI Inflows on Total Factor Productivity: Evidence from African Countries

Abstract

From 2001-2014, had foreign direct investment inflows had significant long-term effects on total factor productivity in African countries. Following the latest dynamic techniques of panel data analysis of pooled mean group and mean group estimator (the Pesaran and Smith 1995, Journal of Econometrics 68: 79-113), we find strong evidence of insignificant impact of FDI inflows on total factor productivity. Augmented mean group estimator(AMG) introduced by Eberhardt and Teal (2010, Discussion Paper 515, Department of Economics, University of Oxford) and the Pesaran (2006,Econometrica 74: 967-1012) common correlated effects mean group estimator results also strongly support insignificant impact FDI inflows on total factor productivity in the long run in African economies. Augmented mean group estimator, common correlated effects mean group estimator and pooled mean group estimator result findings show that covariates or control variables (Trade and Domestic investment) have significant effects on total factor productivity in the long run. The result findings show that covariates or control variables are important determinants (factors) in defining exact relationship between FDI inflows and total factor productivity.

Keywords: FDI inflows; Total Factor Productivity; Panel Data; Economic growth

JEL Classification numbers: C33; F21; F23