The Impact of Foreign Direct Investment on Economic Growth in African Countries
This study examines the impact of foreign direct investment on economic growth, measured as a percentage of Growth Domestic Product, across 46 African countries over the period 2000–2023. Using a quantitative research design, the analysis is based on an unbalanced panel dataset obtained from the World Bank’s World Development Indicators. To address potential Endogeneity arising from reverse causality and omitted variable bias between foreign direct investment and economic growth, the study employs the Two-Stage Least Squares estimation technique. This instrumental variable approach ensures the robustness and consistency of the estimated coefficients, thereby strengthening the reliability of the empirical findings. The Hausman specification test (χ²=15.04, p=0.0199) indicates that the fixed effects model is preferred over the random effects model, suggesting the presence of unobserved country-specific heterogeneity correlated with the explanatory variables. Controlling for key macroeconomic determinants including domestic investment (proxied by gross fixed capital formation), financial development, inflation, government expenditure, and population growth,the results reveal that foreign direct investment exerts a positive and statistically significant effect on economic growth at the 1 percent level. The findings further suggest that foreign direct investment contributes to employment generation and unemployment reduction, reinforcing its role as a catalyst for economic expansion in the region.These results carry important policy implications. Strengthening investor-friendly regulatory frameworks, and improving the overall business climate and they are essential to attract sustained foreign direct investment inflows and foster inclusive, long-term development. While the study advances empirical understanding of the foreign direct investmentgrowth nexus in Africa, heterogeneity across countries and data limitations restrict full regional generalization, highlighting the need for broader future research.
Keywords: Foreign direct investment; Economic growth; Africa; Endogeneity; Two-Stage Least Squares; Panel data.
