Is the causal relation between foreign direct investment, trade, and economic growth complement or substitute? The case of African countries

Abstract

This study examines causal nexus between foreign direct investment (FDI) and economic growth for 25 African countries within a model that also takes into consideration trade openness using more recent panel data set over the period 1980-2018. We used panel bootstrapping cointegration techniques that account for cross-sectional dependence to test whether there is a long-run cointegration relationship or not. The Granger causality approach is employed to conduct predictive analysis among the panel series. Our findings indicate the presence of a long-run equilibrium nexus between the variables, and we found a bidirectional causality between foreign direct investment, trade openness, and economic growth. This study provides an insight for governments and policymakers in this region to restructure FDI and trade policies in such a way that its positive spillover would spread across the rural areas and local firms, thereby leading to an all-inclusive sustainable economic growth and development of African countries in the long run.