Effect of Different Types of Foreign Direct Investment on Economic Growth: Panel Data Analysis

Abstract

This study examined whether different types of foreign direct investment have different effects on economic growth. Specifically, it examined if the different types of foreign direct investment could complement or could displace domestic investment in Sub-Saharan Africa vs. in rest of the world. The study utilized panel data from 142 (36 Sub-Saharan Africa and 106 others) countries over the period of 2003-2017. Possible endogeneity bias was addressed using generalized method of moment estimator. The study revealed that intensive margins of Greenfield foreign direct investment and cross-border merger and acquisition influence economic growth in rest of the world. In Sub-Saharan Africa, however, only extensive margin of Greenfield foreign direct investment is robustly influencing economic growth. The study further identified that Greenfield foreign direct investment margins might displace domestic investment while cross-border merger and acquisition margins could complement domestic investment in rest of the world. In Sub-Saharan Africa, nonetheless, the study reveals that only extensive margin of Greenfield foreign direct investment robustly complements domestic investment. Therefore, Sub-Saharan Africa countries such Ethiopia could directly promote their economic growth by attracting larger numbers of Greenfield foreign direct investment projects rather than inviting foreign direct investment with intensive investments in a few projects. Policies that augment human capital and promote domestic investment could help Sub-Saharan Africa countries to accelerate their economic growth with the help of Greenfield foreign direct investment..