Repackaging FDI for Inclusive Growth: Nullifying Effects and Policy Relevant Thresholds of Governance

Ofori, Isaac K. and Asongu, Simplice A. (2022): Repackaging FDI for Inclusive Growth: Nullifying Effects and Policy Relevant Thresholds of Governance.

Abstract

This study examines whether the remarkable inflow of resources in the form of foreign direct investment (FDI) to SSA contributes to inclusive growth in the region. The study further investigates whether SSA’s institutional fabric modulates the effect of FDI on inclusive growth in SSA. To this end, we draw data on 42 SSA countries for the period 1990 – 2020 for the analysis. The evidence, which are based on the GMM estimator shows that: (1) though FDI fosters inclusive growth in SSA, the effect is weak, and (2) the weak inclusive growth inducing-effects of FDI are weakened or nullified completely by SSA’ fragile governance quality. Nonetheless, the optimism, which we provide by way of threshold analysis shows that channelling resources into the development of these governance dynamics yield positive net effects from the short-term through to the long-term. Notably, the results show that the short-term to long-term FDI-induced inclusive growth gains of developing frameworks and structures for fighting corruption while addressing fragilities in regulatory quality and government effectiveness are outstanding. A few policy recommendations are discussed in the end.

• Item Type: MPRA Paper
• Language: English
• Keywords: AfCFTA; Africa; Economic Integration; FDI; Governance; Inclusive Growth
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F6 - Economic Impacts of Globalization; F - International Economics > F6 - Economic Impacts of Globalization > F63 - Economic Development; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R5 - Regional Government Analysis

References

Acemoglu & Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity and Poverty. Profile Books, London.

Adams, S., Sakyi, D., & Opoku, E. E. O. (2016). Capital inflows and domestic investment in Sub-Saharan Africa: evidence from pooled mean group (PMG) estimation approach. Foreign Trade Review, 51(4), 328-343.

Adegboye, F. B., Osabohien, R., Olokoyo, F. O., Matthew, O., & Adediran, O. (2020). Institutional quality, foreign direct investment, and economic development in sub-Saharan Africa. Humanities and Social Sciences Communications, 7(1), 1-9.

Adeleke, A. I. (2014). FDI-growth nexus in Africa: does governance matter? Journal of Economic Development, 39(1), 111-135.

Adeleye, B. N., Adedoyin, F., & Nathaniel, S. (2021). The criticality of ICT-trade nexus on economic and inclusive growth. Information Technology for Development, 27(2), 293-313.

African Development Bank (2010). African Development Report. African Development Bank, Tunis.

Africa Union. (2015). Agenda 2063: Framework document—The Africa We Want, available at: https://au.int/sites/default/files/documents/33126-doc-01_background_note.pdf

Ajide, K., Adeniyi, O., & Raheem, I. (2014). Does governance impact on the Foreign Direct Investment–growth nexus in Sub-Saharan Africa? Zagreb International Review of Economics & Business, 17(2), 71-81.

Alexander, K. (2015). Inclusive growth: Topic guide. Birmingham, UK: GSDRC, University of Birmingham.

Anand, R., Mishra, S. & Peiris, S. (2013). Inclusive growth: measurement and determinants. IMF Working Papers No. 13/135.

Andrés, A.R., Amavilah, V. & Asongu, S. (2017). Linkages between Formal Institutions, ICT Adoption, and inclusive human development in sub-Saharan Africa. In Catalyzing development through ICT adoption. Springer, Cham.

Anetor, F. O., Esho, E., & Verhoef, G. (2020). The impact of foreign direct investment, foreign aid and trade on poverty reduction: Evidence from Sub-Saharan African countries. Cogent Economics & Finance, 8(1), 1737347.

Alvaredo, F., & Gasparini, L. (2015). Recent Trends in Inequality and Poverty in Developing Countries. Handbook of Income Distribution (Vol.2). Elsevier.

Arellano, M., &Bover, O. (1995). Another look at the instrumental variable estimation of error- components models. Journal of Econometrics, 68(1), 29-51.

Asamoah, L. A., Mensah, E. K., &Bondzie, E. A. (2019). Trade openness, FDI and economic growth in sub-Saharan Africa: do institutions matter? Transnational Corporations Review, 11(1), 65-79.

Asian Development Bank. (2013). Framework of inclusive growth indicators: Key indicators for Asia and the Pacific. Mandaluyong City, Philippines: Asian Development Bank.

Asongu, S. A., & Odhiambo, N. M. (2021). Income levels, governance and inclusive human development in Sub-Saharan Africa. Applied Research in Quality of Life, 16(1), 71-103.

Asongu, S. A., & Odhiambo, N. M. (2020). Foreign direct investment, information technology and economic growth dynamics in Sub-Saharan Africa. Telecommunications Policy, 44(1), 101838.

Asongu, S. A., & Le Roux, S. (2017). Enhancing ICT for inclusive human development in Sub-Saharan Africa. Technological Forecasting and Social Change, 118, 44-54.

Asongu S. A.&Kodila-Tedika, O. (2016). Fighting African conflicts and crime: Which governance tools matter? International Journal of Social Economics, 43: 466-485.

Asongu S. A.& Nwachukwu, J. C. (2016). Revolution empirics: predicting the Arab Spring.Empirical Economics,51:439-482

Bengoa, M., & Sanchez-Robles, B. (2003). Does foreign direct investment promote growth? Recent evidence from Latin America. Universidad de Cantabria, Mimeo.

Bhagwati, J. (1973). The theory of immiserizing growth: Further applications. In M. Connolly & A. Swoboda (Eds.), International trade and money (pp. 45–54). Toronto: University of Toronto Press.

Bourguignon, F. (2017). World changes in inequality: an overview of facts, causes, consequences and policies. BIS Working Papers No. 654.

Brown, C. S., Ravallion, M., & Van De Walle, D. (2020). Can the World’s poor protect themselves from the New Coronavirus? (No. w27200). National Bureau of Economic Research.

Corak, M. (2013). Income Inequality, Equality of Opportunity, and Intergenerational Mobility. Journal of Economic Perspectives, 27 (3): 79–102.

Cornia, G.A. &Martorano, B. (2012). Development policies and income inequality in selected developing regions, 1980–2010 (No. 210). United Nations Conference on Trade and Development.

De Haan, A. (2015). Inclusive growth: beyond safety nets? The European Journal of Development Research, 27(4), 606-622.

Dhrifi, A., Jaziri, R., &Alnahdi, S. (2020). Does foreign direct investment and environmental degradation matter for poverty? Evidence from developing countries. Structural Change and Economic Dynamics, 52, 13-21.

Dollar, D. &Kraay, A. (2002). Growth is Good for the Poor. Journal of Economic Growth 7 (3): 195–225.

Fauzel, s., seetanah, b., &sannassee, r. v. (2015). foreign direct investment and welfare nexus in sub-Saharan Africa. The Journal of Developing Areas, 271-283.

Gohou, G., &Soumaré, I. (2012). Does foreign direct investment reduce poverty in Africa and are there regional differences? World Development, 40(1), 75-95.

Gossel, S. J. (2018). FDI, democracy and corruption in Sub-Saharan Africa. Journal of Policy Modelling, 40(4), 647-662.

Grossman, G. M., &Helpman, E. (1991). Innovation and growth in the global economy. MIT press.

Gyamfi, N. M., Bokpin, G. A., Aboagye, A. Q., &Ackah, C. G. (2019). Financial development, institutional quality and inclusive growth in Africa. Global Business Review, 0972150919875367.

Gygli, S., Haelg, F., Potrafke, N., & Sturm, J. E. (2019). The KOF Globalisation Index – Revisited. Review of International Organizations, 14(3), 543–574.

Hassan, M. K. (2004, December). FDI, information technology and economic growth in the MENA region. In Economic Research Forum 10th Annual Conference, 16-18

IMF. (2007). Globalization and Inequality. World Economic Outlook: 31- 65.

Ivanyna, M. & Salerno, A. (2021). Governance for Inclusive growth. IMF Working Paper (No, WP/21/98). Washington, DC.

Kamah, M., Riti, J. S., & Bin, P. (2021). Inclusive growth and environmental sustainability: the role of institutional quality in sub-Saharan Africa. Environmental Science and Pollution Research, 1-17.

Kang, H., & Martinez‐Vazquez, J. (2021). When Does Foreign Direct Investment Lead to Inclusive Growth? The World Economy.

Kaufman, D., Kraay, A. &Mastruzzi, M. (2010). The Worldwide Governance indicators: A Summary of Methodology, Data and Analytical Issues. World Bank Policy Research. Working Paper, No. 5430.

Khan, M. (2012). The political economy of inclusive growth. In Promoting Inclusive Growth: Challenges and Policies. Paris: OECD.

Lahoti, R., Jayadev, A., & Reddy, S. (2016). The global consumption and income project (GCIP): An overview. Journal of Globalization and Development, 7(1), 61-108.

Levine, R. (2005). Finance and growth: theory and evidence. Handbook of Economic Growth, 1, 865-934.

Magombeyi, M. T., & Odhiambo, N. M. (2017). Foreign direct investment and poverty reduction. Comparative Economic Research, 20(2), 73-89.

Nguyen, V. B. (2021). The difference in the FDI inflows – Income inequality relationship between developed and developing countries. The Journal of International Trade & Economic Development, VOL. 30, NO. 8, 1123-1137. https://doi.org/10.1080/09638199.2021.1925331

Obeng, C., Mwinlaaru, P., & Ofori, I. K. (2021). Global Value Chain Participation and Inclusive Growth in Sub-Saharan Africa. European Xtramile Centre of African Studies, Working Paper, (No. 21/032). http://dx.doi.org/10.2139/ssrn.3846969

OECD (2016). The Governance of Inclusive Growth: An Overview of Country Initiatives, OECD Publishing, Paris.

OECD. (2014). Making Inclusive Growth Happen: The Role of Institutions. In All on Board: Making Inclusive Growth Happen (chapter 4). Paris: OECD.

Ofori, I. K. (2021). Towards Building Shared Prosperity in Sub-Saharan Africa: How Does the Effect of Economic Integration Compare to Social Equity Policies? African Governance and Development Institute, Working Paper (No. 21/045). In SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.3879961

Ofori, I. K., & Asongu, S. A. (2021). ICT Diffusion, FDI and Inclusive Growth in Sub-Saharan Africa. Telematics and Informatics, 65, 101718. https://doi.org/10.1016/j.tele.2021.101718

Ofori, I. K., Armah, M. K., Taale, F., &Ofori, P. E. (2021a). Addressing the severity and intensity of poverty in Sub-Saharan Africa: How relevant is the ICT and financial development pathway? Heliyon, 7(10), e08156. https://doi.org/10.1016/j.heliyon.2021.e08156

Ofori, I. K., &Armah, M. K. (2021b). Towards the Reversal of Poverty and Income Inequality Setbacks Due to COVID-19: The Role of Globalisation and Resource Allocation. African Governance and Development Institute, Working Paper (No. 21/043). In SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3879887

Ofori, I. K., Asongu, S., &Ofori, P. (2021c). Towards Efforts to Enhance Tax Revenue Mobilisation in Africa: Exploring Synergies between Industrialisation and ICTs. Working Paper (No. 21/058). In SSRN Electronic Journal: http://dx.doi.org/10.2139/ssrn.3924824

Ofori, I. K., Dossou, T., Asongu, S., & Armah, M. K. (2021d). Bridging Africa’s Income Inequality Gap: How Relevant Is China’s Outward FDI to Africa? European Xtramile Centre of African Studies, Working Paper WP/21/098.

Ofori, I. K., Obeng, C. K., & Armah, M. K. (2018). Exchange rate volatility and tax revenue: Evidence from Ghana. Cogent Economics & Finance, 6(1), 1537822.

Ohlin BG. (1933). Interregional and International Trade. Harvard University Press: Cambridge, MA.

Opoku, E. E. O., & Boachie, M. K. (2020). The environmental impact of industrialization and foreign direct investment. Energy Policy, 137, 111178.

Opoku, E. E. O., Ibrahim, M., &Sare, Y. A. (2019). Foreign direct investment, sectoral effects and economic growth in Africa. International Economic Journal, 33(3), 473-492.

Pavcnik, N. (2017). The impact of trade on inequality in developing countries (No. w23878). National Bureau of Economic Research. Pickett, K. E., & Wilkinson, R. G. (2015). Income inequality and health: a causal review. Social Science & Medicine, 128, 316-326.

Peprah, J. A.,Ofori, I. K, &Asomani, A. N. (2019). Financial development, remittances and economic growth: A threshold analysis. Cogent Economics & Finance, 7(1), 1625107.

Piketty, T. (2014). Capital in the 21st Century. Cambridge, MA: Harvard University Press.

Pouw, N. R., & De Bruijne, A. (2015). Strategic governance for inclusive development. The European Journal of Development Research, 27(4), 481-487.

Pritchett, L. &Werker, E. (2012). Developing the guts of a GUT (Grand Unified Theory): elite commitment and inclusive growth. Manchester: ESID.

Ravallion, M. (2018). Inequality and globalization: A review essay. Journal of Economic Literature, 56(2), 620-42.

Ravallion, M., & Chen, S. (2019). Global poverty measurement when relative income matters. Journal of Public Economics, 177, 104046

Ravallion, M., & Chen, S. (2004). Measuring Pro-Poor Growth. Economics Letters, 78: 93−99.

Rauniyar, G., &Kanbur, R. (2010). Inclusive Development: a review and synthesis of Asian Development Bank literature. Journal of the Asia Pacific Economy 15 (4): 455–469.

Reyes, G. E. (2001). Four main theories of development: modernization, dependency, word-system, Andglobalization. Nómadas. RevistaCrítica de CienciasSociales y Jurídicas, 4(2), 109-124.

Robinson, J. (1955). The Generalization of the General Theory. In Rate of Interest and Other Essays; Macmillan: London, UK.

Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5), 71-102.

Sakyi, D., &Egyir, J. (2017). Effects of trade and FDI on economic growth in Africa: an empirical investigation. Transnational Corporations Review, 9(2), 66-87.

Samuelson, P. A. (1939). Interactions between the multiplier analysis and the principle of acceleration. The Review of Economics and Statistics, 21(2), 75-78.

Schumpeter, J.A. (1911). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Translated by Redvers Opie. Cambridge, MA: Harvard University Press.

Sen, A. (2010). The Idea of Justice. Cambridge, MA: Harvard University Press.

Sharma, B., &Abekah, J. (2017). Foreign direct investment, foreign aid and incomes inequality: Empirical insights from African and South American countries. Transnational Corporations Review, 9(1), 1-7.

Singh, M. A., Jain-Chandra, M. S., &Mohommad, M. A. (2012). Inclusive growth, institutions, and the underground economy. International Monetary Fund.

Stiglitz, J. E. (2012). The price of inequality: How today's divided society endangers our future. WW Norton & Company.

Stock, J. H., & Watson, M. W. (1993). A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems. Econometrica, 61(4), 783.

Stolper, W. F., & Samuelson, P. A. (1941). Protection and real wages. The Review of Economic Studies, 9(1), 58-73.

Svirydzenka, K. (2016). Introducing a new broad-based index of financial development. International Monetary Fund, Washington, DC.

Tchamyou, V. S. (2021). Financial access, governance and the persistence of inequality in Africa: Mechanisms and policy instruments. Public Affairs, 21(2), e2201.

Tchamyou, V. S. (2020). Education, lifelong learning, inequality and financial access: Evidence from African countries. Contemporary Social Science, 15(1), 7-25.

Tchamyou, V. S., Erreygers, G., &Cassimon, D., (2019a). Inequality, ICT and Financial Accessing Africa, Technological Forecasting and Social Change,139 (2), 169-184.

Tchamyou, V. S., Asongu, S. A., & Odhiambo, N. M. (2019b). The role of ICT in modulating the effect of education and lifelong learning on income inequality and economic growth in Africa, African Development Review, 31(3), 261-274.

Ucal, M. Ş. (2014). Panel data analysis of foreign direct investment and poverty from the perspective of developing countries. Procedia-Social and Behavioral Sciences, 109, 1101-1105.

UNDP (2017). UNDP’s Strategy for Inclusive and Sustainable Growth, New York, USA.

UNDP (2011). Governance Principles, Institutional Capacity and Quality. Bureau for Development Policy, New York, 270-291.

UNCTAD. (2021). World Investment Report. In United Nations Conference on Trade and Development. https://unctad.org/topic/investment/world-investment-report

UNCTAD. (2020). World Investment Report: International Production Beyond The Pandemic. UNCTAD, Geneva.

UNCTAD. (2019). World Investment Report: Global Investment Trends and Prospects 2019: Special Economic Zones. UNCTAD, Geneva.

UNCTAD. (2016). World investment report investor nationality: Policy challenges. Geneva: United Nations Publication.

UNCTAD. (2014). The role of international trade in the post-2015 development agenda. Geneva: United Nations.

United Nations (2015) Resolution adopted by the General Assembly on 25 September 2015, Transforming our world: the 2030 Agenda for Sustainable Development. https://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E

White, H., & Anderson, E. (2001). Growth versus distribution: does the pattern of growth matter? Development Policy Review, 19(3), 267-289.

World Bank (2021). World Development Indicators. April 2021. Washington, DC: World Bank.

World Bank (2020). Poverty and Shared Prosperity 2020: Reversals of Fortunes. October. Washington, DC: World Bank.

World Bank (2013), Inclusion matters: The foundation for shared prosperity, Washington D.C.: World Bank.

Zhuang, J., De Dios, E. and Lagman-Martin, A. (2010). Governance and Institutional Quality and the Links with Economic Growth and Income Inequality: With Special Reference to Developing Asia. Mandaluyong City: Asian Development Bank.

Xu, C., Han, M., Dossou, T. A. M., &Bekun, F. V. (2021). Trade openness, FDI, and income inequality: Evidence from sub‐Saharan Africa. African Development Review, 33(1), 193-203.