Major Determinants of Foreign Direct Investment in the West African Economic and Monetary Region Journal Article

Writer: Nicaise Abimbola، Laleye ؛ Simeon Oludiran، Akinleye ؛

Iranian Economic Reveiw Winter 2018, Volume 22 - Number 1 ، Science-Research (Ministry of Science/ISC (‎42 page(s) - From 121 to 162 )

Keywords: Granger causality FDI WAEMU Determinants

Abstract:

the main concern of this paper is to answer the question of the determinants of FDI inflows to West African Economic and Monetary Union (WAEMU). The literature on FDI recognizes not only the existence of gaps between domestic savings and investment in most developing countries but also that FDI constitutes a cure capable to bring the latest technology and management know-how into these countries. The aim of this paper is to find the macroeconomic determinants of FDI in WAEMU (constituted of 8 countries namely: Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo). To this end, an econometric model based on panel cointegration analysis for the period 1980-2010 was estimated. The results show that countries with high potential market size (GDP per capita), large trade openness and with more business friendly environment (low political risk) attract more FDI. The findings further show that: (i) infrastructure development is one of the most important determinants that attract FDI to the region; alongside the human capital, financial development, macroeconomic stability, exchange rate and political stability; (ii) not all the variables affect FDI the same way in the WAEMU region; (iii) there is a positive relationship between FDI and economic growth which implies that FDI stimulates economic growth; (iv) this study finds a positive relationship between FDI and macroeconomic stability (inflation) in WAEMU; (v) financial development needs to be improved to enable more gain from FDI. This suggests that the impact of FDI can be enhanced through financial development under a good environment that has to be provided in WAEMU.

Machine summary:

Specifically, do per capita GDP, exchange rate volatility, human capital, financial development, infrastructure development, trade openness, macroeconomic environment and political stability affect FDI inflows positively in WAEMU over the period 1980-2010? Nonnemberg de Mendonça (2005), in a panel data analysis for 38 developing countries (including transition economies) for the 1975-2000 period, conclude that FDI is correlated to level of schooling, the economy's degree of openness, risk and variables related to macroeconomic performance like Inflation, risk and average rate of economic growth. To sum up this sub-section, it can be inferred that many variables are found in the literature as determinants of FDI namely: economic growth, trade openness, market size, macroeconomic environment, political stability, natural resources, human capital, infrastructure development, financial development etc. (Table 2) Table 2: Empirical Determinants of FDI to Africa: A Synopsis of the Literature on FDI Determinants Empirical Determinants of FDI to Africa: A synopsis of the literature FDI Determinants Econlit references on Africa Other references on Africa, and in the world Market Size and Growth Availability of Natural Resources Costs and Skills of Human Capital Quality and Quantity of Infrastructure Openness of the Economy Financial Development Macroeconomic stability Morisset (2000); Bende‐ Nabende (2002); Asiedu (2002a, 2006); Lemi Asefa (2003); Yasin (2005); Dupasquier Osakwe (2006); Fedderke Romm (2006). FDI = Foreign direct investment GDPPC= Per capita GDP </0, λ7></0, λ5<0, λ6></0, λ4> OPN= Trade openness [(export + import)/GDP] HC= Human capital (labor force) INFD= Infrastructure development INF= Inflation FD= Financial development EXR= Exchange rate PRK = Political instability (Dummy variable which is 1 if political instability and 0 otherwise).

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