Foreign Direct Investments and Economic Growth: The Primary Drivers

Abstract

In order to achieve the Global Millennium Development Goals (MDGs) there is need for enhanced global partnerships in areas such as trade, health, security, environmental sustainability, food security and education. Owing to these initiatives Foreign Direct Investments (FDIs), Official Foreign Development Assistance (ODAs) and other external capital flows are increasingly considered as drivers of economic growth for developing countries. By year 2000 FDIs flow to developing countries accounted for 19% of the total global FDI flow compared to 52% in 2010. Collectively FDI equates to 11% of global GDP and generates close to 80 million jobs globally. Global FDI totaled to US$ 1.2 trillion in 2010, US$ 1.4 trillion in 2011 and US$ 1.8 trillion in 2012. Similarly, the developing countries received half of the FDI and only invested a quarter of the FDI out flow. Studies show that FDIs contributes to economic growth by stimulating several macro-economic and demographic variables which are major agents of economic growth. This paper sought to explain the effect of FDI on the determinants of economic growth human capital development, financial sector development and trade openness. A sample of 30 African countries was used for the study. The data used was retrieved from UNCTAD and World Bank online databases for the period between 1980 and 2012 and analyzed through a fixed effect regression model. The results of the study show that FDI had a positive impact on measures of financial sector development and trade openness. However the effect of FDI on human capital development was negative. The study recommends the need for favorable monetary policies that elicit more FDI for enhanced economic growth. The study also suggests increased global trade liberalization and integration to boost trade. Finally the study recommends that additional FDI flows should be directed towards human capital development.