Compiled by Ranga 0618441387 , for assistance
MANCOSA MBA
Managerial Economics
Assignment 01
Question 1 (20 Marks)
The nexus between FDI and economic growth in Africa has become a big concern for economist,
researchers and development practitioners. While classical economics and the larger section of
researcher concur that a positive causal relationship exist (Ayenew, 2022), there are other sections
that refute any causal relationship and another section even sought to prove that a negative nexus
exist (Odhiambo, 2022). The relationship between these two variables is also explained in different
growth models that include the endogenous growth theories and the neoclassical models.
Interesting, the debate does not only exist for theoretical literature, it is also carried to empirical
literature as different researchers could not agree on the empirical evidence relating to the
relationship between these variable (Odhiambo, 2022).
The neoclassical models argues that FDI increases the quantity and or efficiency of investment
capital and this boost industrial output. The endogenous model is hinged on the supposed link
between FDI and technological transfer and diffusion. The model stresses that FDI facilitates R&D
and investment in human capital and technology. This technology is the main driver of economic
growth.
Mixed conclusions however could be drawn from recent studies that investigated the nexus, and
the results have differing conclusion- no consensus seems likely. What makes it even more
difficult to crudely conclude from the empirical evidence is that the studies used different
methodologies. Therefore, it is not easy to tell whether the differing results are nor due to
methodologies use or the data. Further, some sources (Asamoah, Mensah and Bondzie, 2019; Miao
et al., 2021) argue that the nexus between FDI and economic growth is moderated by a host of
1
, Compiled by Ranga 0618441387 , for assistance
country specific factors, such as accountability institutions and governance, hence empirical
evidence cannot reconcile.
Using Pesaran Autoregressive Distributed Lag (ARDL) bounds testing approach, Udi, Bekun and
Adedoyin (2020) examined the role of industrialization in the energy-growth-FDI nexus for South
Africa using data over the period 1970 to 2018. The Bayer-Hanck (B-H) combined technique to
cointegration to assess whether a long-run relationship exists was employed. The results showed
that FDI significantly account for increase in economic growth, both in the short-run and long-
run. They also carried causality tests and the results could not refute the possibility of a two way
causal relationship between FDI and economic growth.
This result, while is acknowledges the existence of a long-run cointegration relation, it leaves us
handicapped to conclude that FDI is an important factor in explaining economic growth. The
existence of a two way causal relationship suggest that it might be economic growth that attract
FDI. It is suggested that that, while the study methodology used was fit for the purpose, more
conclusive result would have been obtained if the study had included more countries.
Using ARDL on panel data from 22 nations in Sub-Saharan Africa from 1988 to 2019, Ayenew
(2022) found that FDI promotes economic growth in the long run. However, in the short run, the
effect of FDI on economic growth is statistically insignificant. The study was more robust in terms
of data used, that is many countries data for 30 years. Using the same econometric technique,
ARDL modelling, Odhiambo (2022) found a positive link between the two variables. The study
went on further to test the causal relationship and found out that there is unidirectional causality
from economic growth to FDI- a surprising result since it is assumes its FDI that causes economic
growth However, the studies methodology suffers from the obvious criticism of ARDL model,
that it approximates the stochastic trend that exist in ARDL models, rather than modelling real
dynamics.
Using a system generalized method of moments and dynamic panel threshold regression (FDI) to
investigate the FDI- growth nexus in 28 sub-Saharan African countries over the period 1999–2017,
Anetor (2020) contents that FDI does not have a significant impact on the economic growth in
Sub-Saharan Africa. However, the study made iteration to investigate if human capital moderate
the nexus. After adding the interactive term of human capital on the nexus, the study found that
FDI promotes growth in economies that have strong human capital base and high quality
2
MANCOSA MBA
Managerial Economics
Assignment 01
Question 1 (20 Marks)
The nexus between FDI and economic growth in Africa has become a big concern for economist,
researchers and development practitioners. While classical economics and the larger section of
researcher concur that a positive causal relationship exist (Ayenew, 2022), there are other sections
that refute any causal relationship and another section even sought to prove that a negative nexus
exist (Odhiambo, 2022). The relationship between these two variables is also explained in different
growth models that include the endogenous growth theories and the neoclassical models.
Interesting, the debate does not only exist for theoretical literature, it is also carried to empirical
literature as different researchers could not agree on the empirical evidence relating to the
relationship between these variable (Odhiambo, 2022).
The neoclassical models argues that FDI increases the quantity and or efficiency of investment
capital and this boost industrial output. The endogenous model is hinged on the supposed link
between FDI and technological transfer and diffusion. The model stresses that FDI facilitates R&D
and investment in human capital and technology. This technology is the main driver of economic
growth.
Mixed conclusions however could be drawn from recent studies that investigated the nexus, and
the results have differing conclusion- no consensus seems likely. What makes it even more
difficult to crudely conclude from the empirical evidence is that the studies used different
methodologies. Therefore, it is not easy to tell whether the differing results are nor due to
methodologies use or the data. Further, some sources (Asamoah, Mensah and Bondzie, 2019; Miao
et al., 2021) argue that the nexus between FDI and economic growth is moderated by a host of
1
, Compiled by Ranga 0618441387 , for assistance
country specific factors, such as accountability institutions and governance, hence empirical
evidence cannot reconcile.
Using Pesaran Autoregressive Distributed Lag (ARDL) bounds testing approach, Udi, Bekun and
Adedoyin (2020) examined the role of industrialization in the energy-growth-FDI nexus for South
Africa using data over the period 1970 to 2018. The Bayer-Hanck (B-H) combined technique to
cointegration to assess whether a long-run relationship exists was employed. The results showed
that FDI significantly account for increase in economic growth, both in the short-run and long-
run. They also carried causality tests and the results could not refute the possibility of a two way
causal relationship between FDI and economic growth.
This result, while is acknowledges the existence of a long-run cointegration relation, it leaves us
handicapped to conclude that FDI is an important factor in explaining economic growth. The
existence of a two way causal relationship suggest that it might be economic growth that attract
FDI. It is suggested that that, while the study methodology used was fit for the purpose, more
conclusive result would have been obtained if the study had included more countries.
Using ARDL on panel data from 22 nations in Sub-Saharan Africa from 1988 to 2019, Ayenew
(2022) found that FDI promotes economic growth in the long run. However, in the short run, the
effect of FDI on economic growth is statistically insignificant. The study was more robust in terms
of data used, that is many countries data for 30 years. Using the same econometric technique,
ARDL modelling, Odhiambo (2022) found a positive link between the two variables. The study
went on further to test the causal relationship and found out that there is unidirectional causality
from economic growth to FDI- a surprising result since it is assumes its FDI that causes economic
growth However, the studies methodology suffers from the obvious criticism of ARDL model,
that it approximates the stochastic trend that exist in ARDL models, rather than modelling real
dynamics.
Using a system generalized method of moments and dynamic panel threshold regression (FDI) to
investigate the FDI- growth nexus in 28 sub-Saharan African countries over the period 1999–2017,
Anetor (2020) contents that FDI does not have a significant impact on the economic growth in
Sub-Saharan Africa. However, the study made iteration to investigate if human capital moderate
the nexus. After adding the interactive term of human capital on the nexus, the study found that
FDI promotes growth in economies that have strong human capital base and high quality
2
