Journal of Economic Research. Research Article THE EFFECT OF FDI ON ECONOMIC GROWTH IN WEST AFRICA COUNTRIES A PANEL DATA APPROACH

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1 Journal of Economc Research Open Access Scenfc Publsher Research Arcle THE EFFECT OF FDI ON ECONOMIC GROWTH IN WEST AFRICA COUNTRIES A PANEL DATA APPROACH Wlly Tozoke Laou Man Cheong 1, Hou Junjun 1 1 School of Economcs and Trade, Hunan Unversy, , Changsha, Chna ABSTRACT Correspondence should be addressed o Wlly Tozoke Laou Man Cheong Receved Ocober 3, 017; Acceped January 30, 018; Publshed February 10, 018; Copyrgh: 018 Wlly Tozoke Laou Man Cheong e al. Ths s an open access arcle dsrbued under he Creave Commons Arbuon Lcense, whch perms unresrced use, dsrbuon, and reproducon n any medum, provded he orgnal work s properly ced. Ce Ths Arcle: Laou Man Cheong, W., Junjun, H. (018). The effec of FDI on economc growh n Wes Afrca counres a panel daa approach. Journal of Economc Research, (1). 1-5 Ths sudy esmaes he effec of foregn drec nvesmen (FDI) on economc growh of nne (9) Wes Afrca counres durng he perod of 1995 o 015, usng panel daa approach. As a resul, he FDI s sascally sgnfcan and has a posve effec on economc growh n Wes Afrca counres. As well, FDI needs suppor and drecve from he governmen o have beer producve acves n order o avod s adverse effec on GDP of Wes Afrca counres. KEYWORDS: Economc growh, FDI, Panel daa approach, Wes Afrca counres. INTRODUCTION The Foregn Drec Invesmen (FDI) s defned as nvesmen made o acqure a lasng neres n or effecve conrol over an enerprse operang ousde of he economy of he nvesor (Inernaonal moneary Fund 1993), has ncreased exponenally n developng counres. The role of FDI has been known as a growh-enhancng facor n developng counres and s recognzed as a caalys for oupu growh, capal accumulaon and echnologcal progress. I appears o be a less conroversal hypohess n heory han n pracce. In addon o beng a major source of long-erm capal for nvesmen n nfrasrucure and oher developmen naves. The FDI can be a caalys for economc dversfcaon, helps hese economes o overcome excessve dependence on naural resources. FDI remans one of he mos mporan forms of crossborder capal flow no developng counres. In 01, FDI nflow no developng counres amouned o more han US$790 bllon, exceedng by a wde margn he sze of nward remance (US$406 bllon) and offcal developmen ad (US$16 bllon) from radon OECD donors. Ouward FDI from developng counres, ncludng Souh- Souh flows, are ncreasngly promnen. In 01, US$481.6 bllon of FDI flows (US$5 rllon of sock) orgnaed n developng and ranson counres. They accouned for abou 40 percen of FDI no low-ncome counres (manly n Afrca) n 010. FDI flows no Sub-Saharan Afrca have grown nearly sxfold over he pas decade. The flows ncreased from abou US$6.3 bllon n 000 o US$35 bllon n 01, whle hs s sll jus.5 percen of oal global flows, represens an unprecedened sze of nvesmen capal n mos Afrcan counres, much larger han remances or offcal ad. Snce he fnancal crss, nflows no Afrca have been volale han worldwde nflows. In 01, FDI nflows globally were only abou 60% of he pre-crss level of 007. Neverheless, FDI has become an mporan par of he dscourse on developmen n Afrca. Gven he enhusasm wh whch FDI s beng wh en of he world's 15 mos dynamc economes, s no surprsng ha Afrca connues o arac consderable resources FDI flows and hs posve rend should connue. 1

2 The Wes Afrca s subsanal for a sgnfcan share of foregn drec nvesmen (FDI) n Sub-Saharan Afrca (FDI), aracng an average of 35% of he nflow of FDI no sub-saharan Afrca beween 004 and 013. Ngera represens approxmaely hs fracon and s currenly he hrd larges recpen of FDI n Sub-Saharan Afrca. Whle FDI grew more han sx-fold beween 004 and 011 from USD 3 bllon o USD 19 bllon, fell sharply from 37 percen n 011 o USD 13 bllon from USD 19 bllon o USD 1 bllon. A sharp declne n hs declne was due o Ngera's nflow of FDI, alhough FDI n almos all counres n he regon fell beween 011 and 013 (wh he excepon of Benn, Burkna Faso, Côe d'ivore and Ghana). The selecon of Wes Afrca as he regon for consderaon n hs sudy s parcularly mporan. Despe he numerous sudes on he FDI-growh nexus, here s a sgnfcan dearh of leraure on FDI focusng solely on Sub-Saharan Afrca. A quck search of he Econl daabase reveals ha he few papers whch hghlgh FDI n Afrca eher examne he deermnans of FDI o he regon or are case sudes of he performance of FDI n parcular counres. Ths shorage presens us wh he opporuny o explore he effec of FDI on growh n he regon as a whole, and o conrbue o he small body of exsng leraure on he regon. To sudy he effec of FDI on economc growh n Sub- Saharan Afrca, we employ ordnary leas squares regressons wh fxed effecs on pooled panel daa coverng weny counres over he perod Blongen and Wang (005) fnd ha he napproprae poolng of developed and developng counry daa has caused he esmaed mpac of FDI on growh and domesc nvesmen o be obscured n many FDI-growh sudes, because FDI seems o have a hgher effec on growh n developng counres han n developed counres n ncome erms (World Bank 01a), we consder pollng hem n hs sudy o be a vald approach. Ths paper s addressed o decson makers, nvesors and economss n erms of hghlghng concep of FDI n Wes Afrca counres and s conrbuons on economc growh n hs par of he world. Journal of Economc Research FDI, he populaon, he GDP, he ncome, he rade barrers, he leracy rao and he healh saus. The sudy concluded ha oal FDI are posvely and sgnfcanly relaed o he healh saus. Hansen and Rand (006) used Fxed Effec and a VAR 1 model n 31 counres durng akng no accoun he FDI, he hos counry s characerscs and me dummes. There has been observed bdreconal causaly beween FDI and GDP. Moreover, FDI have long run mpac on GDP and hus hey conrbue o economc growh. Azman San e al (010) appled PTR 6 o sudy he neracon beween local fnancal markes and FDI n 91 counres durng The varables suded were he GDP, he ncome, he populaon, he FDI, he human capal, he governmen expendure and he fnancal markes. I s observed ha here s a hreshold level beyond whch FDI has posve mpacs on economc growh. Kashcheeva (013) used OLS, GMM and FE o nvesgae he relaonshp beween FDI and IPR n 103 counres durng He used he sage of developmen, he FDI, he IPR, he human capal, he governmen expendure, he rade openness, he nflaon and he marke dsorons as varables. The sudy concluded ha boh FDI and IPR have a posve mpac on economc developmen. Masron and Nor (013) appled panel daa analyss o nvesgae he mpac of nsuonal qualy on FDI n 8 ASEAN durng The varables suded were he GDP, he nsuonal qualy, he educaonal expendure, he rade openness and he wage rae. I s observed ha he counres ha mproved he nsuonal qualy and he corrupon conrols araced larger amouns of FDI. Samargand e al (015) appled PCA and ARDL 34 o sudy he neracon beween FDI and economc growh n 5 counres durng The varables used were he rade openness, he FDI, he populaon, he governmen expendure and he gross fxed capal formaon. I s argued ha FDI conrbue o economc growh snce hey mprove producvy, echnology ransfer and adopon of new processes and sklls. The res of he paper s organzed as follows: we presen he objecves of he sudy, and revew some precous works done by searchers, hen we descrbe he mehodology and dscuss he emprcal resuls. We fnally conclude. OBJECTIVES OF THE STUDY The man objecve of he sudy s o measure he effec of foregn drec nvesmen on economc growh n Wes Afrca counres. Specfcally, he sudy ams o: () analyze he share of FDI on economc growh n Wes Afrca; () examne wheher FDI has a posve or negave effec on economc growh; () deermne oher varable ha nfluence on economc growh n ECOWAS. LITTERATURE REVIEW Alsan e al (006) used OLS and rese 19 o nvesgae he populaon healh as a deermnan facor of FDI n 74 counres durng The varables used were he METHODOLOGY The sudy has used he panel daa mehod, hrough whch we wll use he followng hree models: Pooled regresson model (PRM), fxed effec model (FEM) and random effec model (REM). To know he bes models o use n he analyss, wo ess wll be appled: he frs es (LM es) Lagrange mulpler proposal from Preusch and Pagan n (1980). Ths es s used o choose beween (PRM), (FEM) or (REM), he second es s Hausman es (1978), o choose beween (FEM), (REM). Usng a varey of sudes appled o dfferen models n he esmaon of FDI on economc growh n addon o he use of dfferen mehodologes, accordngly, he sandard model n hs sudy, he general equaon s as follows: GDP ( FDI, TRD, GFC, INF) Thus, our growh funcon becomes:

3 GDP (1) where 0 1FDI TRD 3GFC 4 GDP :gross domesc produc n perod, FDI : foregn drec nvesmen n perod, TRD : openness rade as sum of expor and mpor. GFC : governmen fnal consumpon, INF : Inflaon n perod. By akng o he logarhm of GDP, he equaon becomes: ln GDP () 0 1FDI TRD 3GFC 4 The Pooled OLS regresson model INF I can clarfy he compound regresson model as follows: Suppose pooled regresson model homogeney of varances random error beween he counres under sudy lms ( ), ogeher wh zero covarance beween for j counres Cov(, ) 0 js assumes he formaon fxed lm ransacons ( slope coeffcens (, s ) for all counres. Journal of Economc Research INF Y, ~ IID(0, ). The model also, s ) and X ~ IID(0, ) (5) where ; s processed as an error erm composed of wo componens: an ndvdual specfc componen, ha wll no vary over me, and a remander componen, ha s assumed o be uncorreced over me, hs s all correlaon of he error erms over me s arbued o he ndvdual effecs. I s assumed ha and are muually ndependen and are ndependen of X (for all and s). hs mples ha he OLS esmaor for and from (5) s unbased and conssen. The error componens srucure mples ha he compose error erm exhbs a js parcular form of auocorrelaon (unless 0 ). The Hausman es The Hausman es allows choosng beween he fxed effec model and he random effec model. The null hypohess s ha he preferred model s he random effec model vs he alernave whch s he fxed effec model. I essenally ess wheher he unque errors ( ) are correlaed wh he regressons; he null hypohess s ha hey are no. The fxed effec models The fxed effec model s smply a lnear regresson model n whch he nercep erms vary accordng o he ndvdual uns. Y X 1 1 (3) Where s usually assumed ha all X are ndependen of all, we can wre hs n he usual regresson framework by ncludng a dummy varable for each un n he model: Y N jd j1 j X Where d 1f j and 0 elsewhere. We herefore have j a se of N dummy varable n he model. The parameers 1 N and can be esmaed by ordnary leas squares n equaon (3). The mpled esmaor for s referred o as he Leas Squared Dummy Varable (LSDV) esmaor. I may however, be numercally unaracve o have a regresson model wh so many regressors. The Random effec models I s generally assumed n regresson analyss ha all facors ha affecs he dependen varable, bu whch have no been ncluded as regressors can be appropraely summarzed by a random error erm. In our case, hs conduc s o he assumpon ha are random facors, ndependenly and dencally dsrbued over ndvduals. Thus, we wre he random effec model as: (4) DATA AND SOURCE The daa for hs sudy are exraced from World Bank webse. The daase used of consss of 189 observaons of annually for he Wes Afrcan Counres from 1990 o 015. The counres suded were Benn, Burkna Faso, Ivory Coas, Ghana, Lbera, Ngera, Senegal, Serra Leone and Togo. A number of counres whch could have been par of he sample were omed due o lack of suffcen daa on some of he varables under nvesgaon. Ths choce was no arbrary; as he daa comng from a sngle nernaonal source makes possble o overcome he problems assocaed wh mehods and approaches o compellng daa bases. The varables used for emprcal analyss n hs sudy are as follows: Dependen varable: Gross Domesc Produc (GDP). Independen varables: Foregn Drec Invesmen (FDI), Openness rade (sum of expor and mpor) (TRD), Governmen fnal consumpon (GFC), Inflaon (INF). RESULTS AND DISCUSSIONS Pooled OLS regresson model Here, we pool he 189 observaons ogeher and realze he regresson model, neglecng he naure of cross-seconal daa and me seres. 3

4 Journal of Economc Research Table 1: Pooled OLS regresson oupu Ln GDP Coef. Sd.Err P> FDI TRD GFC INF Cons Number of Obs. = 189 F (4,184) =1.57 Prob. >F= R-squared= Adj. R-squared= Roo MSE= Source: Auhor s calculaon Form able 1, we see ha he p-value of he TRD s less han 5%, meanng he varable can explan he GDP a level of Whle, he varables FDI, GFC and INF are no sacally sgnfcan a 5% level. Bu for he me beng, we shall no accep he resul of hs pooled regresson model. For we see ha he hreen counres are no same. Then now, we shall develop Fxed Effec model and we are assumng ha our hreen counres have dfferen nercep. Fxed effec or LSDV Model The fxed effec or LSDV model allows a heerogeney or an ndvdualy among hreen counres by leng hem have her own nercep values. Table : LSDV resuls. Ln GDP Coef. Sd.Err P> FDI TRD GFC INF Cons Number of Obs. = 189 Number of group= 9 Obs. per group: mn = 1 Avg= 1.0 Max=1 F (4,176) =6.91 Prob. >F= Source: Auhor s calculaon We can easly say our model s accepable and fed, also all coeffcens of he model are equal o zero, because our Prob >F = less han The probably of FDI varable s less han 5%, FDI s sacally sgnfcan. The p-values of TRD (0.31), GFC (0.083) and INF (0.960) are all bg han 5%, meanng no sgnfcan o explan he varable GDP. Random effec model Table 3: Random effec resuls. Ln GDP Coef. Sd.Err P> FDI TRD GFC INF Cons Number of Obs. = 189 Number of group= 9 Obs. per group: mn = 1 Avg.= 1.0 Max=1 F (4,176) =6.91 Prob. >F= Source: Auhor s calculaon The oucomes of he random effec show ha he probably value of he F-sasc s equal o less han 0.05, meanng our model s well fed and accepable. We fnd also ha he varable FDI s sacally sgnfcan. However, TRD (0.88), GFC (0.08) and INF are no sgnfcan o explan o GDP. 4 Hausman Tes Here our hreen counres ha have common mean value for he nercep. Now we shall apply Hausman Tes o check whch model s he bes (Fxed Effec or Random Effec). Null Hypohess: Fxed-effec model s approprae Alernave Hypohess: Random-effec model s approprae

5 Journal of Economc Research Table 4 Varable (b) Fxed (B) Random (b-b) Dfference Sqr(dag(v_b-v_B)) S.E. FDI TRD GFC INF Ch (4) = (b-b) [(v_b-v_b) ^ (-1)] (b-b) = 0.57 Prob.>ch = Seeng he probably value s less han 10%, we accep our null hypohess. So, he fxed effec model s more approprae han he random effec model. Indeed, our sudy consder he resuls of fxed effec models: ln GDP FDI 0.043TRD 0.064GFC INF The above equaon shows ha nfluence of FDI as predcaed s posve and sgnfcan a 5% level of sgnfcance. The resuls of he log-log= model should be reaed as elascy one percenage change n ndependen varable leads o percenage change n he dependen varable. In hs case, an ncrease n FDI by 1% s relaed o 0.176% ncrease n a specfc regon s growh, whch means ha FDI posvely nfluence economc growh n Wes Afrca counres economes. These resuls are conssen wh Pelnescu e al. (009). Furhermore, rade openness and governmen fnal consumpon are also posvely correlaed wh economc growh bu no sgnfcan o explan o. CONCLUSION The sudy amed o esmae he effec FDI on economc growh n Wes Afrca counres durng he perod of 1995 o 015, hrough a form of panel daa whch ncludes economc growh measured by lngdp as he dependen varable, and a number of ndependen varables, whch ncluded Foregn Drec nvesmen (FDI), Openness rade (TRD), Governmen fnal Consumpon (GFC), and Inflaon (INF) n nne (9) Wes Afrca counres. The sudy fnds ha foregn drec nvesmen n Wes Afrca counres does nfluence economc growh posvely. An ncrease n FDI s posvely correlaed wh an ncrease of economc growh n Wes Afrca counres. The governmens for ECOWAS counres need o manage and gve drecon o FDI o producve acves n order o avod he adverse effec of FDI on GDP. They should develop her economes faser by fghng agans corrupon and gvng more ncenve o nvesors. Thus, effors should be dreced owards polces ha wll mprove economc growh, such as busness envronmen, and openness, n order o have a greaer mpac on mpors, whch plays a srenghen role n economc growh. REFERENCES [1]. Pelnescu Elena, Dulescu Magdalena (009). The mpac of foregn drec nvesmen on he economc growh and counres expor poenal, Romanan Journal of Economc Forecasng, 4, pp []. Hermes, N., and Lensnk, R. (003). Foregn Drec Invesmen, Fnancal Developmen and Economc Growh. Journal of Developmen Sudes, 40, [3]. Campos, N.F., and Knosha, Y. (00). When s FDI good for growh? A Frs Look a he Experence of he Transon Economes. Workng Paper. [4]. Carkovc, M., and Levne, R. (00). Does Foregn Drec Invesmen Accelerae Economc Growh? Unversy of Mnnesoa. Workng Paper. [5]. Keshava, S. (008). The effec of FDI on Inda and Chnese Economy; A comparave analyss. Second Sngapore Inernaonal Conference on Fnance. [6]. Lumbla, K.N. (005). Wha makes FDI Work? A Panel Analyss of he Growh Effec of FDI n Afrca. Afrca Regon Workng Paper Seres No. 80. [7]. Awe, A.A. (013), he Impac of Foregn Drec Invesmen on Economc Growh n Ngera, Journal of Economcs and Susanable Developmen, Vol.4, No.. ISSN [8]. Emmanuel, Umeora (013), Effecs of Foregn Drec Invesmen (FDI) On Economc Growh n Ngera, from accessed hp://papers.ssrn.com/sol3/papers.cfm?absrac_d=85 39 [9]. Hsao, Cheng (003), Analyss of Panel Daa, Second Edon, Uned Kngdom he Unversy Press, Cambrdge. [10]. Melnyk, Leond, Kubako, Oleksandr&Pysarenko, Serhy (014), he Impac of Foregn Drec Invesmen on Economc Growh: Case of Pos Communsm Transon Economes, Problems and Perspecves n Managemen, Volume 1, Issue 1. [11]. Xv. Sukar, Abdulhamd, Ahmed, Syed& Hassan Sed (015), The Effecs of Foregn Drec Invesmen on Economc Growh: The Case of Sub-Saharan [1]. Verbeek, Marno (000), A Gude o Modern Economercs, Brsh Lbrary Caalogung n Publcaon Daa, ISBN