ECONOMIC INTEGRATION, FOREIGN DIRECT INVESTMENT AND GROWTH IN ECOWAS AND SADC

Abstract

The causality between Foreign Direct Investment (FDI) and growth has remained a subject of debate. The FDI flows and growth have been unstable in Economic Community of West African States (ECOWAS) and Southern African Development Community (SADC).The FDI in ECOWAS grew by about 2.4% in 1994−2003 and 3.8% in 2004−2013 with gross domestic product growth (GDPGR) of 0.2% and 0.3% respectively. In SADC, FDI grew by about 4.3% and 4.8% with GDPGR of 1.1% and 2.7% respectively in 1994−2003 and 2004−2013 much higher than that of ECOWAS.The average economic integration (ECOINT) index was about 1.1 and 1.4 for ECOWAS and SADC respectively. Although the ECOINT in the two trade blocs are relatively low, that of ECOWAS is lower. Thus, the issue of whether the ECOINT determines FDI flows and/or GDPGR has remained pertinent. This study, therefore, examined the role which ECOINT plays in FDI-growth relationship in the trade blocs.

The FDI location and augemented neoclassical growth theories framework were utilized to evaluate the role of integration in FDI-growth relationship. The main determinants of FDI considered were GDPGR, domestic investment, liquidity, exchange rate, external debt, adult dependency ratio, consumer price index and integration measures- trade–GDP ratio (TGDPR), relative size of the bloc’s trade in total world output (RSBTW) and inter-regional trade index (TRDINT). These variables were augmented with population size and foreign aid to explain growth variations in the two trade blocs. Two variants of the model were estimated- with and without integration measures. Data were obtained from World Development Indicators(2013), United Nations Conference on Trade and Development database(2013) and African Statistical Yearbook (2014). The fixed and random effects (FE and RE) panel techniques and the two-stage least squares, which control for both omitted variable and simultaneity biases, were utilised. Fixed redundant and Hausman-test statistics were used to check the robustness of the FE and RE models and all estimated coefficients were evaluated at p 0.05.

Without integration, a 1.0% rise in FDI increased GDPGR by 0.002% in ECOWAS and 0.003% in SADC. Likewise, a 1.0% rise in GDPGR increased FDI by 1.1% in ECOWAS and likewise 1.6% in SADC (-1.3). This demonstrated more FDI inducing ability of GDPGR in SADC compared to ECOWAS. With integration, the coefficients of FDI changed to negative(-0.01) in ECOWAS with TGDPR(2.9) RSBTW(0.1) and TRDINT(2.7) having significant influence. FDI coefficient in SADC remained positive (0.01,0.02, 0.01). Negative effects of GDPGR on FDI occurred in ECOWAS compared to SADC. On the average, integration increased the effect of GDPGR on FDI by about 1.1% in SADC while this is reduced by 0.9% in ECOWAS. Adult dependency ratio(-2.8), external debt(-0.4), investment(0.4), liquidity(1.3) and exchange rate(-0.1) influenced FDI flows significantly in ECOWAS while investment(0.6), liquidity(0.7) and exchange rate (-0.3) had significant effect on FDI inflows in SADC. External debt and investment affected growth significantly.

Integration complemented Foreign Direct Investment in ECOWAS and served as substitute in SADC to facilitate growth. Therefore the trade blocs seeking Foreign Direct Investment inflows for growth should emphasise integration.

Keywords: Foreign direct investment, SADC and ECOWAS trade blocs, Fixed and random effect.

Word count: 495