2019-HUSSAINI SHITU-The effect of Foreign Direct Investment on Financial development, trade openness, unemployment and civil unrest of members in ECOWAS

University Id：
10532
Student Id：
LY2015086
Subject Index：
TP301
Security Level： Normal
1
1
MASTER'S THESIS
The effect of Foreign Direct Investment
on Financial development, trade
openness, unemployment and civil
unrest of members in ECOWAS
Student Name
万方数据
Hussaini Shitu
College
Business Administration
Supervisor
Professor
Major
Management Science and Engineering
Research field
Finance and Risk Management
Date
May, 2019
ZHU Huiming
University ID：10532
Students ID：LY2015086
Subject Index：Normal
MASTER'S THESIS
The effect of Foreign Direct Investment on
financial development, trade openness,
unemployment and civil unrest of member
in ECOWAS
Student Name:
万方数据
Hussaini Shitu
College:
Business Administration
Major:
Management Science and Engineering
Research field:
Finance and Risk Management
Supervisor:
Professor
ZHU Huiming
1
1
1
1
1
Submission Date:
May,2019
1
Defense Date:
2019-5-15
1
The effect of Foreign Direct Investment on financial development,
trade openness, unemployment and civil unrest of member in
ECOWAS
By
Hussaini Shitu
A thesis submitted in partial satisfaction of the
Requirements for the degree of
Master of Management
In
Master of Science in Management Science and Engineering
In
The Graduate School
Of
Hunan University
Supervisor
Professor ZHU Huiming
May 2019
万方数据
学位论文原创性声明和学位论文版权使用授权书
湖 南 大 学
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I
万方数据
The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
摘
要
西非国家经济共同体由发展中国家组成。因此，外国直接投资和相关贸易活
动被视为刺激经济增长和发展的关键催化剂。毫无疑问，外国直接投资可以成为
从发达国家向这些发展中国家转移技术进步的工具。许多学者认为国内投资有所
改善，东道国的机构和人力资本质量得到提高。然而，本文假设外国直接投资可
以播种超出该范围。因此，本文试图从微观经济和宏观经济角度评估外国直接投
资的重要性。该研究目标是确定外国直接投资金融发展，贸易开放，失业和西非
国家经济共同体成员国内乱的影响。
本研究论文的分析基于来自 15 个 EOWAS 成员国的横截面数据。由于贸易显
示了经济区块经济稳定增长的一瞥，本文旨在评估其对金融发展，失业，贸易开
放和内乱的数量影响。
在此背景下，本研究调查了西非国家经济共同体（西非经共体）的外国直接
投资与经济增长之间的关系。本研究将使用跨越 2001 年至 2015 年的面板数据。
为了实现这一目标，该研究应通过面板单位根，异构面板协整和 SUR 多元回归进
行实证分析。 Pedroni 协整检验的研究结果表明，在调查 ECOWAS 地区的所有因
素之间存在协整关系。协整分析还表明，金融发展，外国直接投资，国内贸易和
贸易开放等变量之间存在积极而重要的关系，而失业和社会动荡与经济增长负相
关，尽管失业率并不具有统计意义。
该论文假设外国直接投资与贸易正相互作用。但是，明确的宏观经济政策的
制度稳定性对于外国直接投资推动经济发展是必要的。
实证结果表明，FDI 与西非经共体国家的经济增长密切相关。结果与之前关
于增长 -
FDI 建模的理论一致。研究结果表明，西非经共体成员国应该提供有
利和有利的环境，以吸引外国直接投资自由流入其经济。
关键词：FDI;经济增长;异构面板协整;西非国家经济共同体; SUR 多元回归。
II
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MASTER'S THESIS
Abstract
The Economic Community of West African States is composed of developing
countries. As a result, Foreign Direct Investment and related trading activities are
considered as key catalysts for spurring economic growth and development.
Undoubtedly, Foreign Direct Investment can be tool for transferring technological
advancements to these developing countries from the developed states. Many scholars
have attributed improved domestic investment, and enhancement of t he quality of the
institutions and human capital in the host states. However, this paper has
hypothesized that Foreign Direct Investment can sow beyond that scope. As a result,
this paper endeavors to evaluate the significance of FDI from both the micro economic and macro-economic perspectives.
The analysis of this research paper is based on cross-sectional data that is derived
from the 15 EOWAS member states.
With the trade indicating glimpses of steady
economic growth on the economic block, this paper aims at evaluating its quantitative
impact on financial development, unemployment, trade openness and civil unrest.
The paper hypotheses that FDI positively interacts with trade. However,
institutional stability of clear macroeconomic policies are necess ary for Foreign
Direct Investments to drive the economy forward.
Empirical result shows that FDI strongly relates to economic growth in ECOWAS
nation. The results are consistent with the previous theories on growth-FDI modeling.
The research findings suggest that ECOWAS members should provide a conducive
and enabling environment to attract a free flow of FDI into their econom ies.
Key words: FDI; Economic growth; Heterogeneous panel cointegration; ECOWAS;
SUR multiple regression.
III
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
CONTENTS
学位论文原创性声明和学位论文版权使用授权书 ................................................... I
摘
要 ........................................................................................................................ II
Abstract ....................................................................................................................III
CONTENTS ............................................................................................................. IV
FIGURES ................................................................................................................. VI
TABLES .................................................................................................................. VII
LIST OF ABBREVIATIONS ................................................................................ VIII
CHAPTER 1 INTRODUCTION ................................................................................ 1
1.1 Background .....................................................................................................1
1.2 The motivation for the study ..........................................................................3
1.3 Objectives of the study ....................................................................................4
1.4 Research hypotheses .......................................................................................4
1.5 Scope of the study ...........................................................................................4
1.6 Significance of the study .................................................................................5
1.7 Scheme of chapters ..........................................................................................6
Chapter 2 THEORETICAL BASIC ANDLITERATURE REVIEW ........................ 7
2.1 Theoretical Basic .............................................................................................7
2.2 Conceptual definitions ....................................................................................7
2.2.1 The definition of foreign direct investment .............................................7
2.2.2 The definition of Economic growth ........................................................ 11
2.2.3 Financial Development ........................................................................... 13
2.3 The Problem of economic growth in West Africa ........................................ 14
2.4 Theoretical framework ................................................................................. 15
2.5 Empirical Literature Review ........................................................................ 20
Chapter 3 AN OVERVIEW OF ECOWAS .............................................................. 30
3.1 Introduction of the Region ........................................................................... 30
3.2 Background of ECOWAS .............................................................................. 31
3.3 Characteristic of ECOWAS member states ................................................. 32
3.4 Socio-economic characteristic of ECOWAS................................................. 33
IV
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MASTER'S THESIS
3.5 Supply impact of investing capital in the region ......................................... 34
3.6 Demand impact of investing capital in the region ....................................... 35
3.7 Economic performance and structure of the region .................................... 35
Chapter 4 RESEARCH METHODOLOGY ............................................................ 37
4.1 Introduction ................................................................................................... 37
4.2 Method of data collection ............................................................................. 37
4.3 Variables measurement ................................................................................. 37
4.4 Specification of Model .................................................................................. 39
4.5 Estimation techniques ................................................................................... 40
4.5.1 Panel unit root ......................................................................................... 40
4.5.2 Fisher-type test using ADF and PP Tests ............................................... 40
4.5.3 Hadri unit root ........................................................................................... 41
4.5.4 Heterogeneous panel cointegration test ................................................. 42
Chapter 5 Data Analysis and Discussion of Findings ............................................ 43
5.1 Introduction ................................................................................................... 43
5.2 Panel unit root test ........................................................................................ 43
5.3 Panel Granger causality test ......................................................................... 47
5.4 Discussion of findings ................................................................................... 49
Conclusion ................................................................................................................ 51
Limitation of the Study ....................................................................................... 53
Contribution of the Study ................................................................................... 54
References ................................................................................................................ 56
Acknowledgment ...................................................................................................... 63
V
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
FIGURES
Fig.1 Map of West African States ................................................................................2
VI
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MASTER'S THESIS
TABLES
Table 5.1 ADF Unit Root Test Results ....................................................................... 43
Table 5.2 Pedroni Panel Cointegration Test ............................................................... 45
Table 5.3 Panel long run estimators ........................................................................... 46
Table 5.4 Panel Granger Causality Test Results ......................................................... 47
Table 5.5 SUM Regression Result (RGDP as the dependent variable) ....................... 48
VII
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
LIST OF ABBREVIATIONS
CAGR
Compound Annual Growth Rate
CU
Custom Union
CM
Common Union
DFI
Direct Foreign Investment
EG
Economic Growth
EU
Economic Union
CEE
Central and Eastern Europe
ECOWAS
Economic Community of West African States
FDI
Foreign Direct Investment
LDC
Least Develop Countries
LnGDPG
Log of Gross Demotic Product
LnFDI
Log of Foreign Direct Investment
LnFD
Log of Financial Development
LnTO
Log of Trade openness
LnDI
Log of
Domestic Investment
LnUNEM
Log of
Unemployment
MNCs
Multi-National Corporations
MME
Multi-National Enterprises
MENA
Middle East and North America
OECD
Organization for Economic Co-operation and Development
OCA
Optimal Currency Areas
SME
Small Medium Enterprises
SUR
Seemingly Unrelated Regression
UNCTAD
United National Conference Trade and Development
USAID
United State Agency for International Development
WAMZ
West African Monetary Zone
WAEMU
West African Economic Monetary Unit
VIII
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MASTER'S THESIS
CHAPTER 1 INTRODUCTION
1.1 Background
Growth and development of a country cannot be overemphasized. Foreign direct
investment (FDI) has proved important since 1980s. By the year 2010, FDI has largely
contributed to the external finance pool for the West Africa states and the inward
stock by this year has accumulated to approximately one-third of West African states
GDP increased compared 10% in 1990 (UNCTAD, 2015). Several works of literature
have emphasized the significance of FDI as a capital creator for development projects
in West Africa countries (Borensztein et al., 1998; Acemogluet al., 2006). West
African Countries, therefore, develop strategies to attract more FDI into their
economies (Mengistus and Adams, 2007). To attract FDI inflows, developing
countries have generated economic agendas such as tax concessions, provision of
loans at low interest rates, grants, allocation of subsidies, increased investment on
infrastructure, development of export processing zones and other concessions
(Raheem and Oyinlola, 2013).
Akinlo (2004) identifies four reasons why developing countries, particularly in
Africa, view the role of FDI as a potential driver to cause economic growth. Firstly, it
facilitates a crucial need for capital intended for investment. Secondly, it increases
competence of industries in host countries. Thirdly, it facilitates productivity of
domestic firms through adoptions of relevant technology and investment in human
and physical capital. Finally, the nature of its ownership structure potentiates its
relevance in propagation of growth and development. FDI proves to be more stable as
a source of investment capital and can be substantiated with other forms capital inflow.
In other words, FDI enables a country to source for capital, generate employment,
provide access to foreign markets, and generate both technological and efficiency
spillover to domestic firms. As shown by Addison and Mavrotas (2004), for example,
FDI has the potential of transferring technology, capital, and knowledge to the host
countries.
The Economic Community of West African States (ECOWAS) is keen in
achievement of high rates of economic development and thus be able to attract more
capital investment from abroad. ECOWAS (see Fig. one) was established in 1975, and
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
has moved from a Free Trade Area (FTA) to the customs union (CU) before becoming
a Common Market (CM) and then an Economic Union (EU). It covers member nations,
such as Benin, Burkina Faso, Cape Verde, Cote d'Ivoire, Gambia, Ghana, Guinea,
Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo.
ECOWAS is among the biggest economic blocks in Africa. Scholars believe that the
economic growth among member of ECOWAS has resulted to the growth of its
membership.
Fig.1 Map of West African States
For decades, FDI has caused immense development in a significant number of
countries through transfer of technology, provision of employment opportunities and
growth in industrial competition. FDI has also bridged trade gaps and provided
managerial skills for economic development. Ahmed et al. (2003) denote that many
developing countries have executed important economic policy reforms and
market-friendly incentives by the late 1980s. Such a significant move was in bid to
encourage the accumulation of capital and efficient allocation of resources. This study
attempts to evaluate the impact of foreign direct investment (FDI) on economic
growth of ECOWAS countries by focusing on the period of 2001 -2015.
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1.2 The motivation for the study
According to (Andenyangtso, 2005), economic growth is a function of both
domestic and foreign investment. Furthermore, the cap acity foreign investment to a
particular economy depends on economic growth rate (Fabayo, 2003).
Although
numerous empirical studies focus on the economic benefit of FDI, studies on how FDI
affects specific areas in the economy such as employment, technol ogy, trade, and
entrepreneurship still remain largely unexplored. Therefore, this thesis studies the
effect of FDI to the West African States to identify some factors that affects the
economy. The study seeks to give answers to the following questions.
I. What impact does FDI exert on financial development, trade openness,
unemployment and civil unrest of members of ECOWAS member countries?
FDI is perceived as one of the most critical elements to enhance the economic
growth in the developing countries, because it acts as catalysts for growth for
developing countries by expanding employment, technology and export base,
capacity-building, and spillovers to local firms. Investment from foreign businesses
creates space for relevant service industries, which increases the potential for
economic growth in host countries. However, the perception of the roles
multi-national companies retarding growth and development of domestic industries
has generated the hostility towards FDI. However, FDI improves overall economic
growth of West African states by promoting competition in the local companies to
adopt better production methods. One of the ways through which FDI positively
affected economic growth in the West African state is through capital accumulat ion.
Given that domestic savings in West African states are meager, it results in low
investment rate and hence leads to slow economic growth. Scholars have been
studying to determine how FDI affects the economy in the long -run.
II. Is there a long run relationship between FDI and economic growth?
The behavior of macroeconomic variables is of paramount to policymakers when
it comes to decision making. There convergence or divergence overtime helps in
designing austerity measures to tackle shocks that might cause distortion both short
and long-run relationship should be observed to help in planning. Forecasting the
inflow and outflow of investment requires critical knowledge of macroeconomic
behavior both in short and long run. Therefore, this research seeks to establish if FDI
affects economy growth of nations in the long-run.
3
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
1.3 Objectives of the study
This research overall objective is to determine the effects of FDI financial
development, trade openness, unemployment and civil unrest of members of
ECOWAS countries and, thus, will answer the following questions.
i.To examine how FDI affects the economic growth member countries of
ECOWAS.
ii.To
examine
how
FDI
affect
financial
unemployment and civil unrest of
development,
members of
trade
openness,
ECOWAS.
iii.To determine the long run relationship between the FDI, financial development,
trade openness, unemployment and civil unrest of member of ECOWAS .
iv.To examine whether there is directional causality between FDI,
development, trade openness, unemployment and civil unrest of
financial
members of
ECOWAS.
1.4 Research hypotheses
To empirically examine the effect of foreign direct investment on financial
development, trade openness, unemployment and civil unrest of members of
ECOWAS, this study proposes the following
research hypotheses:
H01: FDI doesn’t positively and significantly affect economic growth of
ECOWAS member countries.
H02: There is a significant impact of FDI, financial development, unemployment,
trade openness, domestic investment and civil unrest of members of ECOWAS.
H03: There is a long run relationship between economic growth and financial
development, trade openness, unemployment, and civil unrest.
H04: There is no causality between FDI, and financial development, Trade
openness, unemployment, and civil unrest.
1.5 Scope of the study
This study is to examines how of FDI effect financial development, trade
openness, unemployment and civil unrest of members of ECOWAS countries by
controlling for other factors. The study covers the periods of 15 years (2001-2015).
The choice of time frame was dictated by data availability.
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1.6 Significance of the study
The study examines the effect of FDI on financial development, trade openness,
unemployment and civil unrest of members of ECOWAS countries. The contribution
of this work will be useful for the both policy makers and Academician.
The study is vital to the entire member countries in many broad aspects. Firstly,
the study provides valuable information to policy-makers for effective policy
formulation and implementation geared towards promoting efficient economic
growth. Secondly, the study also holds significance to the regulatory bodies for taking
proper measures that will help in improving the level of FDI inflows to ECOWAS
member countries. Thirdly, this study contributes to the existing body of literature in
this area, and serves as reference material to academia. Fourthly, the study will also
be a stepping stone for redirection of strategies, programs and Policies that will
enhance given attention to rural areas for even development. Finally, the result of the
study will form part of the needed information by other scholars. On the other hand,
Observing the above evolutions that are being characterized in regard to foreign direct
investment, the current research will help investigate the factors that motive the
currently observed systematic behavior amongst the investors. This topology in FDI
would cover some key inducements by investors when selecting the regions to invest
such as; acquisition of some strategic resources or desire to serve a given market, and
et cetera. The studies available have been observed to adopt an approach that is
investment-motive based. However, this literature piece employs a more systematic
application of the approach; and thus it would be possible to come up with some
reform packages that would effectively establish investor characteristics. Moreover,
researches would effectively contribute to the existing works of literature if they
redefine On the other hand, Observing the above evolutions that are being
characterized in regard to foreign direct investment, the current research will help
investigate the factors that motive the currently observed systematic behavior
amongst the investors. This topology in FDI would cover some key inducements by
investors when selecting the regions to invest such as; acquisition of some strategic
resources or desire to serve a given market, and et cetera. The studies available have
been observed to adopt an approach that is investment-motive based. However, this
literature piece employs a more systematic application of the approach; and thus it
would be possible to come up with some reform packages that would effectively
establish investor characteristics. Moreover, researches would effectively contribute
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
to the existing works of literature if they redefine their research methodological
techniques and approaches in order to accommodate the specifics of activities and
diverse sectors that are covered by global value chain.
Moreover, the future researches could be refashioned in order to meet the reforms of
various governments especially in Africa. Most of the reliable and abundant literature
that has been available so far has largely focused on the challenges that are currently
facing the prospects of foreign investments and thus reorienting future researches
could as well capture changing business environment.
1.7 Scheme of chapters
To achieve the purpose of this study, the study is organized into five chapters.
Chapter one contains the introduction which provides the background to the study,
research questions, study objectives, research hypothesis, significan ce of the study,
and the scheme of chapters. Chapter two presents the literature review, covering
issues on the conceptual framework, theoretical framework, and empirical literature
review. Chapter three presents an overview of ECOWAS and the impact of investment
in West Africa. Chapter four presents the research methodology, and outlines the
nature and sources of data, sample period, variable measurements, and techniques of
data analysis and model specification. Chapter five contains data presentation,
analysis, and interpretation, research results, and discussion of findings, the
conclusion and policy proposals.
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Chapter 2 THEORETICAL BASIC ANDLITERATURE
REVIEW
2.1 Theoretical Basic
Most researcher shows that FDI have positive effect on economic growth of the
less developed nations (see Hermes and Lensink, 2000; Ragimana, 2012, Imoudu,
2012; Oloyede 2014). However, the debate is inconclusive due to the contrary view of
some scholars. In line with the debate on FDI on financial development, trade
openness, unemployment, and civil unrest to economic growth, this chapter is
dedicated to the literature review. The chapter covers a brief introduction, conceptual
definition, theoretical framework, and empirical literature review. The concepts of
foreign direct investment (FDI) Financial development, Economic growth will be
discussed in the next section below.
2.2 Conceptual definitions
In order to determine how FDI effect Financial development, trade openness,
unemployment and civil unrest of members of ECOWAS countries within the period
between 2001 and 2015, it is necessary to provide a conceptual meaning of the
keywords. This section covers the definition
of terms financial development, foreign
direct investment, economic growth, and ECOWAS.
2.2.1 The definition of foreign direct investment
Foreign Direct Investment (FDI) is a concept of international investment
whereby the investors significantly influence the operation in another country other
than in the investors’ home land country. FDI has become an essential force in the
international economy. The World Bank
by 17% and stood at an estimated
Report shows that in the year 2017 FDI fell
$1.52 trillion up from
$1.81 trillion in the
previous year. Also, there is some evidence that government investment policies
around the world are being modified to promote FDI.
African continent received just 2.5 percent of global FDI in 2014 . West Africa
receives 0.6 percent of it,
accounted for 33.1 percent of FDI inflows in Africa over
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
the period 2000 and 2014. ECOWAS in 2014 attracted 23.2% less FDI. During these
preceding seven years, project numbers rose at a Compound Annual Growth Rate of
which
the second largest growth in the entire Africa. In the same period the capital
investment grew with a rate of 14.3%. But major events such as Ebola outbreak in
Guinea since December 2013 retarded the ability of investors to launch development
projects in West Africa. Ebola cost Guinea, Liberia and Sierra Leone USD$500million
in 2014, and USD$1.6billion
in 2015 according to World Bank reports.
However, most African countries exhibit features such as poor infrastructure, low
human capital, poverty, and corruption. These features make private foreign direct
investors refrain from capital allocation to developing countries. In other words,
economies in these countries are less attractive for investment purposes. Four major
shortcomings in the economic setup of most African countries leave them vulnerable
to economic shocks. Firstly, these countries largely depend on exports of even basic
commodities. For this purpose, they are easily at the verge of external shocks
particularly with regards to trade shocks. Secondly, these countries over-rely on
agriculture and therefore are exposed to natural shocks such as, droughts and floods,
which leave the economy severely crippled. Thirdly, government and firm ignorance
has made this countries to be vulnerable to sudden economic shifts. The
underdevelopment of financial sectors of this countries makes them to have a low
credit rating (Morrissey et al, 2012). Lastly, these countries exhibit a weaker tax
system that makes them vulnerable to budget deficits. For thi s reason, these countries
experience severe stretch to government resources and therefore are not able to handle
economic shocks in the economy. Thus, African countries seem to be in a perpetual
cycle of instability due to low private capital flows and poo r economic performance.
Therefore, policies to attract FDI become one of the most critical strategies for
promoting economic growth and development in these countries. FDI can also
catalyze economic development through increasing financial and capital infl ows,
expansion
of
employment
and
export
base,
generation
of
technological
capability-building, efficiency spillover to the local firms, and establishing
investment arrangements (Olayiwola and Okodua, 2007).
Observing the fact that the flow of capital to the developing nations and regions
has greatly increased in the past decades, most of the authors of the subject have
established that Africa countries have relatively reduced when compared to other
developing regions in the world. This contrasts the observation that the rate of return
on the various investments in the region has significantly increased over the same
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period. Most scholars develop the perspective that capital flows resulting to Foreign
Direct Investment enhance the transparency of the internat ional transactions.
Moreover, the studies by most scholars have illustrated that FDI has greatly sacrificed
the domestic sovereignty of most African countries in the faith that the cash flows
would enhance the countries standards of living. However, most o f the authors
acknowledge that FDI has increased investment opportunities in the ECOWAS
coupled with major transformations such as development in human capital, physical
investment, and increased productivity by the local industries and enhancement in
education. The above factors are observed as being some key definitions of
development and growth in the ECOWAS.
Most of the ECOWAS member states are characterized by low income per capita
and arguably very low savings that limit the quantity of domestic inve stment. Hence,
most of the authors relate this situation to the existence in the huge investment gap. In
addition, most of the articles observe deficiency in technology and skills for
investment and thus explaining the level of development in these states (Jaspersen et
al., 2000). Moreover in the definition of growth by ECOWAS, most authors have
observed the changes in the balance of payments over the last decade in which most of
these countries have experienced huge volumes of imports and very minimal expo rts.
Hence, most of the authors note that FDI has contributed to economic growth in these
states by relatively reducing the foreign exchange gap experienced in the last few
years.
FDI has observed in some articles has also contributed to additions in the state’s
external resources that have greatly enhanced the local production. The trend has
enabled growth by resolving limitations that were initially observed in savings, skills
and foreign exchange and thus increasing the general output of the countries. Growth
as illustrated by some authors is the ability gained by most of the African economies
in utilizing the increased cash inflows to create wealth and also keeps p with the
contemporary international updates like other developed nations. Therefore, FDI has
resulted to improvement in the welfare of the ECOWAS the increase in domestic
investments, and increase in the national domestic income. Most of the factors that
have been used by most authors in this subject include; the scale of domestic
investment, openness to trading opportunities, rate of returns on the national
investments, capital availability, and realization of some favorable social -economic
atmosphere. Return of capital helps in establishing the direction in which capital
flows. In addition, FDI net inflows has greatly helped in the bridging of the gap
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
between the deficient production factors and enhance the output and thus improving
the income per capita of the ECOWAS.
However, it is evident on how FDI has influenced the net inflow of the dome stic
investments and thus leading to major economic developments observed by the
economic block. The definition of growth and FDI that is derived from the studies is
obtained from the observation that economic activities have significantly increased
and thus leading to improve per capital wealth.
The capacity to protect the key
sources of wealth by the economic block has been coupled by realization of economic
stability, and the enhancement of the macroeconomic, environmental and social
factors.
FDI has also been accredited as the potential source of enlightening the
productive sectors through competitions, stimulation of economic progress, creation
of jobs, and fostering growth in the host economies. However, despite the genuine
desire and the efforts of the Least Develop Countries to attract most needed foreign
investment, some factors, such as debt burden, render them unattractive. These factors
has eroded assurance in developing countries. Others reasons include low credit
worthiness, economic recession and persistent macroeconomic and political instability,
which have further aggravated foreign investor’s perception (Ayanwa, 2007).
The role of FDI on economic growth has been studied in many literary works.
These studies are both empirical and theoretical works. FDI has immensely impacted
on regional growth, especially on the development particular countries, through
efficient transfer of technology, identification of employment opportunities, fostering
competition, bridging the balance of trade gap, and provision of managerial skills
among the others.
For instance, Xolani (2010) denotes that FDI can benefit a county
not only by supplementing domestic market but also in terms of creating jobs,
technology transfer, increasing in competition of domestic in dustries and other
positive externalizations that come with the attraction of foreign investment. Similarly,
Ahmed et al. (2003) notes that by the late 1980s, accumulation of capital and explicit
resource allocation were greatly propagated by significant p olicy changes and
market-friendly incentives. Based on these findings, this study intends to examine the
impact of FDI on economic growth of West African State and determine the direction
of causality between FDI and economic growth in the West African Sta tes.
A wide range of evidence drawn from economic theory and empirical evidence
alludes that FDI bares a great impact on developing host countries. Therefore, by
managing
these
impediments,
developing
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economies
can
acquire
maximum
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developments for the purposes of economic growth. If FDI is indeed a potential
venture for both foreign investors and host economies, the value and expense of FDI
should be carefully examined, mainly by the host countries in quest for economic
freedom.
Capital markets also play an important role on moderating the relationship
between FDI and economic growth.
Understanding the role of capital markets can be achieved through proper
visualization of the path through which these investments are made. In regards to this,
an important distinction must be made between the investment class and the
entrepreneurs. The role of the investment class is to shift capital and resources from
their jurisdiction to the entrepreneurs. However, such a transfer cannot occur without
a medium the capital market. In extrapolation, commercial entities transform their
money into other forms of assets with the aim of gaining interests, dividends, as well
as the appreciation of capital. It brings lenders and borrowers together through
exchange of security and capital in form of money. It works on the principle of
placing demand and supply of loanable funds at an equilibrium. Through this, there is
easy transfer of capital and resources from one sector or country to another for
economic or commercial purposes. In addition, there is enhancement of successful
project implementation or monetary and indignation influence. If capital markets can
be strengthenned, the flow of foreign investments can be accelerated in which case,
FDI is boosted and potentied to accelerate economic growth.
2.2.2 The definition of Economic growth
Economic growth is the process of improving the value of goods and services
generated by the economy. It implies the overall capacity of the economy to increase
its production of goods and services. The macroeconomic indicators, especially the
GDP and per capital shows the level of wealth with respect to the population of the
country, while economic development indicates strategies or moves that seeks to
elevate the economic well-being and standards of living of the society. Strategies for
economic development involve activities that would subject members of society to
income earning, for instance, job creation. When the yearly growth rate of the
economy, such as GDP, became equal or more than the population growth rate, it is an
effectively economic advancement. Negative economic growth appears when the
country’s’ economy undergoes contraction and the gross domestic product reduces.
Economic growth is obtained by proper management an allocation of local and by
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
increasing production capacity of a country. It facilitates the equitable distribution of
incomes among the population and society in general. Cumulatively, the effects
become huge in a period expanding over a decade or two, even for the small
differences between the production rate and population growth.
For a long period, economic growth rates in West Africa nations have been so
low to cause significant containment of poverty. Inherently, farmers and firms in
West Africa produce and trade in highl y localized markets and fail to achieve the
necessary economies of scale required to lure bro ad-spectrum investments that
could accelerate economic growth and contain poverty. Because of some constraints,
such as inefficient transportation, trade barriers, a highly dependence on family and
informal financial sources, and lack of constant and stable supply of power, West
African products are being non-competitive in the international marketplace.
United State Agency for International Development strategy for West Africa is to
cooperate with regional entities and private investors in order to evaluate crucial
barriers to industrial competitiveness and to provide solutions that would entirely
demonstrate the productive potential of West African countries in triggering a greater
regional investment.
Introducing a standard currency or common currency in the region is an issue
which get mixed reactions. In as much as may see feasible, the currency affairs may
have some setback and limit. The burden issue raise on the currency can put an
agonistic conclusion made base on the economic rationale upon which the currency is
founded. The benefits and challenges of common currency were highlighted by the
theory of Optimum Currency Areas (OCA). OCA theory adopts a spe cific notion that
a region should meet the thresholds for optimal economic growth while giving up the
adjustment tool of their existing currency system. These criteria take into account that
the countries have similar patterns of production and trade and w hether economic
supply and demand shocks are likely to be dynamic across the countries.
The OCA criteria customs are very limited. However, policymakers argue that a
unification of currency would synchronize economic cycles as it will boost trade.
In West African countries, governments for decades have made significant efforts
towards maximizing warfare. Therefore, three critical rationale influences the
increase in State Expenditure in West African countries. Wagner (2005) categorizes
these factors in a wide array of social activities of the state, governance role of the
state (that include administrative and protective works), and welfare functions. These
factors are a further segment of socio-political rank, that is, the state of social
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functions expanded over time, including retirement insurance, natural disaster aid
(either internal or external), and ecological protection plan. Consequently, there is an
increase in public expenditure into the sciences, technology and various investment
projects. These states have always relied on foreign government loans for
contingencies coveragee, resulting in the exorbitant growth of government debt for
servicing expenditure.
2.2.3 Financial Development
Financial development refers to the expansion and establishment of a country’s
markets, instruments and institutions that spur and sustain the economic growth of the
respective state. Hence, the financial development of the country would therefore be
evaluated using the increment in the efficiency, stability, access and size of the
financial system at any given time. Hence, the development would be characterized by
efficient capital allocation, proper exercise of the country’s corporate governance;
diversification, trading and management of the investment risks, enhancing of the
access to the local market, and pooling and mobilization of the country’s savings.
The states that have enhanced their financial systems are observed to benefit
from sustained periods of economic development and growth. Most literatures
establish the FDI greatly influences positive financial development of any state
depending with the respective absorptive capacity of the country (Alfaro et al., 2004).
Moreover Alfaro et al., (2004) refer to the huge debt crisis in the 80’s, emerging
markets experienced in the 90’s, the great bubble burst in the dawn of 21 st century
and the recession in 2009; in which the attitude of most of the developed states
changed in regard to FDI. These developed countries relied on the Foreign Direct
Investments in order sustain their financial development. FDI since then has been
excellent in inspiring lower costs and enhanced efficiency in the host countries (Shah,
2013b). From the expectations of most countries, the benefits of foreign investments
include labor trainings and utilization of the available resources.
Both the developed and developing nations have been observed to create some
investment agencies that establish the financial and fiscal incentive policies in order
to attract FDI. Most of the scholars have tried to establish the concept that
undeveloped local financial systems tend to limit the financial benefits a state can
derive from FDI. Omran & Bolbol (2003) sometime tried to explore the impact of the
size and efficiency of the domestic financial systems on t he attraction of FDI in the
Arab states in 1975 to 1999. They managed to establish a positive correlation between
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
the variables. Zakaria (2007) could not establish substantial correlation on the
influence caused by the size of the domestic banks to the FDI.
However Nasser & Gomez (2009) used domestic banks and the stock market in
relation to the same and found that there existed a substantial coefficient between the
variable and FDI to the economy of the south American states. Kinda (2010) analyzed
77 developing states using the micro-level data established that financial restrictions
greatly influenced inward FDI and almost discouraged it’s operation. Further study by
Mahmoud (2010) further established that the financial activities and progress of the
host countries greatly influenced the inward FDI in more than 62 states. One of the
notable researches regarding the casual relationship between financial development
and FDI in five ECOWAS includes that by Adeniyi & Omisakin (2012). The duo used
some of the financial establishment measures such as the domestic credit availed to
the private sector, the liquid liabilities and domestic credit that is available to/by the
domestic banking sector as a proportion of the GDP. However due to the
heterogeneity of the investigated countries, various financial deepening measures
were necessary to the respective countries in order to spur development in respect to
their economic structures. Some other researches in Africa include by Ezeoha &
Cattaneo (2012) in the Sub-Saharan Africa; and Korgaonkar (2012).
The most common result suggests that Africa as a whole is facing a great
challenge in the formulation of suitable policies to spur financial development. The
creation of an efficient and attractive is not a common goal am ongst the ECOWAS
members and thus resulting to difference in the health of the various financial systems.
This suggests that a conclusive remark is not possible ECOWAS as an economic block
but only remarks can be made regarding the members of the body. FDI and Financial
development interchangeably influence each other.
2.3 The Problem of economic growth in West Africa
Unemployment is a significant issue for ECOWAS member states. A significant
cause of this high unemployment is thought to be the lack of labor market flexibility.
Individual member countries would seek to reduce unemployment, although their
membership of the single currency would hinder the measures that members of the
West African Monitory Zone (WAMZ) can take.
Another cause of unemployment in WAMZ is claimed to be low savings in the
individual countries. It implies that the access to domestic employment -enhancing
investment capital is limited. The aspirants to membership of the single currency will
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introduce deflationary fiscal and monetary policies to meet the convergence criteria
which are likely to worsen the unemployment situation.
Concerns have also been raised regarding disparity in FDI inflows among West
African countries. Not all countries in the sub-region have experienced an increase in
FDI flows. The monetary union might bring more FDI, the benefits are not always
evenly distributed. They are likely to be concentrated in countries with large domestic
markets that are used as platforms to "export" to other member states. In this
circumstance, some countries might even experience a further reduction in
investments.
Furthermore, heavy dependence on international capital investment and the
increasing mobility of inter-regional resource flows can fuel macroeconomic
instability. It is therefore recommended that financial institutions are adequately
prepared to accommodate larger capital flows in order to limit the frequency of crisis
situations in ECOWAS region. (Schadler, 1994), alludes that this would “…cause to
rapid consumption growth, rising or sustained high inflation, an appreciating real
exchange rate and widening current account deficits”. Corker et al. (2000) also argue
that foreign capital inflow has a potential effect on inflation. In agreement to this, it
can be emphasized that higher inflation rates can resulting due to FDI.
2.4 Theoretical framework
Economic growth is one of the indices accorded internationally. Moreover, the
countries take into account the potential benefit of an increasingly growing economic
sector by drafting copious plans, policies, and regulations in order to achieve a state
of social freedom (through enhanced social well-being) and economic prosperity on a
long-term perspective. On perspective of economics, many factors contribute to
economic growth, among which is technology, physical and human capital.
Meanwhile, one of the main variables that boost economic growth as aforementioned
is foreign investment an important factor.
Foreign investment may greatly impact economic growth since it increases
production, added value, employment, and export, and these indicator s directly
correlate with GDP directly to a nation’s economy. For example, employment
escalates the individual’s income, while this income increase was calculated in GDP.
Likewise, it affects added value and export in the same manner. Indirectly, foreign
investment proliferates GDP as well. For instance, the acquisition of technology,
knowledge, and expertise contribute to economic growth through license, imitation
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
and job training. Moreover, the consequent positive internalizes, such as technology
spillover, human capital formation, efficiency, and productivity, are the factors which
indirectly increase GDP in economic growth.
The quality and cost of production of goods and services is directly prop ortional
to the type of technology used in production. When a nation adopts a modern,
efficient and effective technology for production then it’s bound to increased
productivity and cost cut.
The nation will be at a point that it is able supply
improved and quality products at a lower cost of production. Consequentially, the
country will enjoy economies of large-scale raising the production and per capital
output. The reasons for higher productivity can be gauged, by considering the
spillover effect in domestic enterprises. Borensztein et al. (1998) show that the lack of
a similarity in human capital in among countries also reflects on kind of technology,
and therefore the capacity to have dynamics in GDP internationally.
One theory that greatly links Foreign Direct Investment to Economic growth and
development is the Diamond Porter Theory that as most scholars claim, greatly
various countries and economic blocks to compete in tough global markets. As
observed from most cases, this has greatly enhanced the product qualities and
productivity amongst the member countries. In regard to the trading factors in the
world, the trend of productivity in any region is greatly magnified by the individual
welfare of the member countries. The theory defines how the firms, industries and
various countries can realistically become connected in order to work on two or one
economic dimension.
In relation to the theory, the country can effectively utilize the capital it
generates from the Foreign Direct Investment to specializ e on the products that it can
conveniently produce (Krugman & Obstfeld, 2003). Therefore, the ECOWAS member
countries can export the commodities that they have the least absolute disadvantages
and conversely import the commodities that they have the bigges t absolute
disadvantage, despite the absolute cost disadvantages experienced. Thus, competitive
advantage advocates for specialization among the member ECOWAS countries.
However, such competitive advantage is largely different from the specialization that
depends on the absolute advantage of a country. The question that arises from the
model is whether it’s possible for a nation that less efficient in a given commodity
manage to export the given commodity to a neighbor country that is likely to be more
efficient in the commodity production.
Most of the economic literature materials have tried to establish the comparison
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on the international performance of various countries when the countries gain
competitive advantage in a given product (Maneschi, 2008). Mor eover, most articles
have tried to identify the various ways in which countries from various economic
blocks can benefit from specializing in particular terms of trade. The most commonly
referenced model is the Revealed Comparative Advantage in which the s cholars have
compared the share of the export of a given commodity in the world with the export
share of the country in the world based on overall commodities. Therefore it can be
observed that a country that greatly gains capital gains in a particular pro duct as a
result of Foreign Domestic Investment can greatly gain competitive advantage in the
export market.
Some of the theories that enumerate the importance of Foreign Direct Investment
on the developing economies focus on the state of output and the g rowth economic
activities in ECOWAS. Some of the major theories include;
i.The Two-Gap theory
Chenery & Strout (1966) established some development phases in which the
growth is likely to improve based on some limiting factors such as the savings gap,
skill limit and the gap in foreign exchange. At the initial phases, growth in these states
is mostly limited to investment. As observed, technologies and foreign skill reduce
the investment savings, foreign exchange and skill. Due to the fact that these gaps
influence the development of the states, there is then some possibility for
development;
To the equation for the national income;
Y= C + I + (X – M)
And thus;
S = (Y – C)
In which I- investment (capital formation), X-export, C-Consumption, M-import and thus
S-for the savings;
Deriving from the Y equation then;
Y=C+S
And thus equating the Y equations;
National Income becomes; C + I + (X – M) = C + S
Subtracting C from both ends;
I + (X – M) = S
I = S + (M – X)
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
And if imports are more than exports, in which M>X, then the Foreign Exchange Gap,
F becomes F=M-X, in which F is the capital import. Therefore, I=S+F, and thus
F=I-S.
The theory further illustrates that a state can improve its investment or capital
formation from its capital inflow or domestic savings. The theory also illustrates that
FDI would make a state to spend beyond its production scale as observed from the
equations above. In addition, the theory illustrates that FDI enables the country to
make more investments than savings.
Hence it can be drawn from the theory that when ECOWAS takes a step to reduce
the gap between the investments and savings amongst its members states, then the
reliance on the Foreign direct Investments would greatly reduce.
ii.Hymer Theory
Another theory that has been greatly reviewed is the Hymer theory by Hymer
(1976). In this theory, the developing economies have a high investment return due to
low per capita income.
iii. Heckscher-Ohlin Theory
This theory helps determine the trade patterns between various countrie s in an
economic block. The theory states that the products that require more resources for
production are imported in exchange for the products that require can be produced
from the abundance of the available resources. The theory establishes that skilled
labor and physical capital are abundant in the developed countries. This trend
translates to the developing countries.
iv.The New growth Theory
The New Growth Theory helps on the integration of technology in markets where
the functions relate. Hence, the theory basically emphasizes on the availability of
knowledge as being the key driver for economic growth.
As observed from the theories, Foreign Direct Investment has been perceived as
a form of power that influences Economic Growth both indirectly and dire ctly
especially in the African economies. Basing on the models established by these
theories, it can be seen that there is a positive relationship between economic growth
and FDI. However, some record null or even negative relationship. In the results
indicating some relationship between FDI and economic growth, there are some
factors that are observed to influence the relationship such as level of the available
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human capital, availability of well-established financial markets, openness of the
market regimes and the state of the foreign and domestic investment.
However, literatures (both theoretical and empirical) relate FDI on growth
through technological advancements. Technological improvement has caused capital
transfer from countries with surplus to countries that suffer an economic deficiency.
This has influenced positively the growth potentials of the host countries. While some
works of literature show a negative relationship, others show neutrality as to whether
on economic growth and FDI are associated. Theories presented by Boyd and Smith
(1992), suggest that financial limitations and shortcoming such as preexisting trade
and price metamohosize FDI to negatively influence resource allocation. This is to
mean that in presence of financial loopholes, FDI monopolizes allocation of resource
and therefore makes it difficult to cause economic growth. This is a critical issue in
developing countries. However, the whole burden cannot be embedded on financial
loopholes; the main issue for the developing economies is that they have an unreliable
economic structure. Their economic system is quite uncertain in that economic
strategists cannot certainly affirm their fate. This can be attributed to poor
infrastructure, unreliable human capital, use of outdated techn ology and other
variables. These shortcomings limit the capacity and potential of the involved
economy to attract advancement of technology and knowledge acquisition (Chimbelu,
2017).
For years now, the FDI has been characterized by questions and debates t hat are
hard to elucidate. Such discussions have being characterized by lots of ideological
dogmas on the effect and role of FDI on the economy of states. Despite the behavior
and trends of cross-border investments taking various shapes, there is need for more
research to supplement existing literature. Most works of literature miss on the point
that FDI is not only revolving around capital flow amongst the involved nations but
also significantly on the technological know-how. FDI is not considered as a
substitute for trade. Foreign investments have become systems of international
productions in which various investors get stationed in certain countries in order to
generate goods and services which form an extensive global value chain (GVC). In
addition, foreign and oversee investing has now extended to the young and developing
nations, rather than huge MNEs. Moreover, small firms are also investing beyond
their boundaries as components of digital economy. Investors share intangible
commodities such as brands and technical know-how with local capital assets.
Moreover, there is a new trend developing in the Non-equity Models of Investments
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
which include contract farming, outsourcing, management contracts, and franchising.
Observing the above evolutions that are being characterized in regard to foreign
direct investment, the current research will help investigate the factors that motive the
currently observed systematic behavior amongst the investors. This topology in FDI
would cover some key inducements by investors when selecting the regions to invest
such as; acquisition of some strategic resources or desire to serve a given market, and
et cetera. The studies available have been observed to adopt an approach that is
investment-motive based. However, this literature piece employs a more systematic
application of the approach; and thus it would be possible to come up with some
reform packages that would effectively establish investor characteristics. Moreover,
researches would effectively contribute to the existing works of literature if they
redefine their research methodological techniques and approaches in order to
accommodate the specifics of activities and diverse sectors that are covered by global
value chain.
Moreover, the future researches could be refashioned in order to meet the
reforms of various governments especially in Africa. Most of the reliable and
abundant literature that has been available so far has largely focused on the challenges
that are currently facing the prospects of foreign investments and thus reorienting
future researches could as well capture changing business environment.
2.5 Empirical Literature Review
The effect of FDI on financial development, trade openness, unemployment and
civil unrest is one of the focal point for many researchers. In bid to develop a link,
such studies have focused on reviewing remarkable evidence of the matter in question
in different states. The previous studies have obtained different results. FDI has
contributed to a major part in several regions’ economies. Among of the policymakers,
there is an extensive belief that FDI boosts host countries productivity as well as
improving development. Some of the studies have found out the causality between the
two variables. Due to the different methodology used, researchers have generated
divergent opinions. Some researchers, for example, Nasreen et al. (2011) investigate
this matter empirically during the period 1983-2008 using the independent larson
panel study, and show a co-integration of FDI and economic growth.
Khan and Khan (2010) over the period 1981-2008, employ both Granger
causality test and co-integration test in Pakistan to investigate an observable
co-relation between industry-specific FDI and output. The result of the study supports
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the evidence that there is a stable relationship between FDI and output, especially in
the long run, while in the short run, other studies prove a two -way causality between
FDI and GDP.
Chakrabotry and Nunnenkamp (2008) investigated on the relationship between
economic growth and FDI based on some specific industries in India. They
established that the growth on the outputs was greatly influenced by the
manufacturing sector. Subsequent studies by Shahbaz and Rahman (2012) on imports,
financial development and FDI discovered that the trio positively contributed to the
Pakistan economic growth. Subsequent studies have revealed that there exists a
positive relationship between economic growth and FDI. However, the debate on
whether finance influences the economic growth of a country is still evident in most
literatures.
Igbal et al., (2013) investigate data from India and China, and found out that FDI
critically caused increased per capital income in these two economies by impacting on
the GDP growth rate. Similar studies by Lian and Mu (2013) that employs time series
data in Western China analyze the causal relationship between FDI and economic
growth from 1986-2010. The study is steered using time series estimation of
augmented dickey fuller (ADF) unit root test, error correction analysis, co-integration
test, and Granger causality test. The findings suggest that FDI is quite insignificant in
matters of economic growth, and imply that FDI may have crowded -out foreign
investment rather than augmenting domestic market.Thus, it can conclusively asserted
that there is lack of consensus among scholars on relationship between FDI and
economic growth. However.it can be viewed that different countries have different
economic systems. While some economic systems encourage and give space to FDI,
some are actually dormant in this regard. Since many studies provide evidence of
relationship, hypothetically, those states in which FDI do not influence their economic
growth probably are silent in addressing FDI.
With FDI being widely perceived to be one of the key factors that can greatly
help in economic development, productivity and technology, the trade openness of a
state is thus likely to improve (Isac et al., 2011). Most of the literatures have defined
trade openness as being the aggregate of the imports and exports of any given state in
proportion of the Gross Domestic Product. With ECOWAS harboring developing
countries, most literatures observe that enhance trade openness by doing away with
most of the trade barriers (Kahai & Simmons, 2005). Moreover, the states can also
expand the market opportunities available for foreign investors which would in turn
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
provide more employment for the citizens and avail new technologies. With such
measures, the economy of the economic block would be integrate d with the global
economies (Hailu, 2010; Al Shibami, 2011; Moghaddam & Redzuan, 2012). However,
most of the articles reviewed establish that trade openness has some influence on the
FDI inflows (Pradhan, 2010; Neagu, 2014).
Investigations by One (2012) on Nigerian GDP within the period 1986-2007
caves out that it is lowly or insignificantly influenced by FDI. A similar study
conducted by Ekeria et al. (2015) examines the impact on fiscal policy on the growth
of the Nigerian economy using time series data collected between 1960-2012.
It
shows that fiscal policy has a direct relationship to growth. Sichei and Kinyonde
(2012) also show that since 2000, Africa-wide environment has become more
conducive to FDI.
Anyanwu (2011) shows that market size, trade openness, higher government
consumption expenditure, and agglomeration are positively related to FDI in Africa,
while higher financial development produced an adverse effect on FDI inflow into the
African continent. Bang et al. (2007) study the impact of FDI on economic growth of
China and Vietnam using FDI inflow sectoral data. The outcomes show that for the
two developing-transition economies , FDI has a statistically ssignificant positive
effect on economic growth operating directly and through its interacti on with labor.
Similar studies conducted by Garge et al. (2012) show that FDI found an factor
effecting India’s the level of economic growth.
Adeniyi et al. (2012) investigate the causal relationship between FDI and
economic growth in few West African countries using a vector error correction model
(VECM) and find that financial sophistication proxy by financial development matters
a lot in attracting FDI to West Africa's economic growth. Campos and Kinoshita
(2002) investigate the impact of FDI on economic growth in 25 Central and Eastern
Europe and former Soviet Union transition economies between 1990 -1998 and find
that FDI has a positive effect on economic growth.
In addition, Imoudu (2012) investigates the relationship between FDI and
economic growth in Nigeria between 1980-2009 through the application of Johansson
co-integrated techniques and Vector Error Correction model
(VECM) in which
various components FDI are dis-aggregated. The result shows that dis-aggregated FDI
impact on the Nigeria’s real growth of namely Agriculture, Mining, manufacturing,
and petroleum sector is minimal except in the telecommunication sector which has a
hopeful future.
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Awe (2013) examines the impact of FDI on the economic growth of Nigeria
during the period 1979-2006. As revealed by the
study, negative relationship
between economic growth and FDI as a result of insufficient FDI into the Nigerian
economy.
Sadik et al. (2013) investigate the nature of the relationship between FDI and
economic growth using data from Pakistan tha t spanned from 1981 to 2010. The
result reveals that Pakistan’s economic performance is negatively affected b y
foreign investment while its domestic investment has benefited its economy.
J yun and Chin (2006) further analyze whether the FDI promote economic
growth by using threshold regression anal ysis. They find that FDI solely plays an
uncertain part in economic contribution based on 62 countries sample during the
period 1975 to 2000 and find that initially GDP and human capital are important
factors in ex plaining FDI. Furthermore, FDI usuall y has a significant positive
effect on host nations, especiall y when they have increased human capital and
GDP.
Nazhat (2009) examines the impact of FDI on economic growth of Pakistan
using data from 1980 -2000. He adopts endogenous growth theory and applies
regression analysis in his study. According to his findings, there is no positive as
well as statistically significant relationship between GDP and FDI inflows in
Pakistan.
Ajayi (2016) argues that FDI created externalize through new technology and
investment in physical infrastructures like roads and factories. It implies that FDI
improves overall economic growth by promoting competition in the domestic input
market and leads domestic firms in adopting more efficient methods for their
production process. With the FDI inflows new
sources, like
new technology,
capital, knowledge, managerial skills and physical capital, are introduce to host
country’s economy. FDI is brought by large corporations which are experienced i n
skills and superior in technology, and this additional value can be one of the reasons
FDI inflows enhance growth of economy.
Apergiset et al. (2014) use panel data set involving 27 transitional economies
over the period 1991 to 2000 to study the relation between FDI and economic growth.
The result shows that FDI has a significant positive relationship between economic
growths of all nations.
Kherfi and Soliman (2005) examine the effect of FDI on economic growth of 23
countries two regions, six countries from the Middle East and North Africa (MENA)
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
and 17 countries from Central and Eastern Europe (CEE) by using data averages from
four periods 1979-2002. Their main findings suggest that FDI on growth in both
countries is harmful.
Chowdhury and Mavrotas (2005) produce empirical evidence on the relationship
between FDI and economic growth using single and simultaneous equation estimates
for 140 countries at the macroeconomic level. Their results outlay a positive and
statistically significant relationship between FDI and economic growth.
FDI can improve overall economic growth by promoting competition in the
domestic input markets and led the domestic firms to adopt a more efficient method of
their production process (Adam, 2015). The dependency theorists argue that reliance
on investment is likely to hurt economic growth and the allocation of income. Johnson
(2006) finds that FDI should have a positive effect on economic growth as a result of
technology spill-over and substantial capital inflows. The results show that FDI
inflows improve the economic growth of developing economies, but not in
underdeveloped economies.
Conversely, Adeniyi et al. (2012) investigate the impact of FDI on economic
growth using data from East African countries spanning between 1990 an d 2005. The
result shows that FDI induces growth of Ghana, Gambia, and Sierra Leon, but neither
short or long run relationship is found for Nigeria. Conversely, Jibir et al. (2015)
examine the relationship between FDI and output using Nigeria data,
and reveal that
there is a definite connection between FDI and GDP. Rehman (2016) examines the
nexus between FDI and economic growth using a Pakistan dataset. The result reveals
that there is a unidirectional causality between FDI and economic growth running
from economic growth to FDI.
Adil and Mohammad (2014) examine causalities among FDI, economic
growth and financial development proxies by both equity market size and bank
credit to private sectors using a structural co -integration model with a vector
error correction
mechanism to test for the short -term dynamics of these
variables. The results reveal that developed financial markets are an essential
precondition for the positive impact on FDI on economic growth, reflecting host
countries ability to exploit FD I more efficiently.
Sackey et al. (2012) investigate the effect of FDI on economic growth of
Ghana and test the present long -run linear relationship between FDI inflows and
economic growth. Their finding reveals long -run relationships exist among the
variables. They further conclude that a positive relationship between the
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variables.
Insah (2013) investigates the relationship between foreign direct investment
and economic growth in Ghana using dynamic ordinary least squares. It is found
that FDI has a positive effect on economic growth. However, the effect of a three
year lag of FDI economic growth has an adverse effect.
Tsen (2010) uses the Granger Causality on time series data spanning
1978-2002 for China. The results indicate that there is a bi -directional causalit y
among the variables. The results confirm that China's economic growth has an
impact on its exports and domestic demand. In other studies, Lamine and Yang
(2010) appl y Granger causality test on Guinea republic's data. They find that FDI
level is still too low to promote the growth and conclude that, FDI would also
increase if GDP in Guinea increased,. Deductions from these two studies clearl y
indicate that the relationship between FDI and GDP is dependent on the host
country.
The impact of the Foreign Direct Investment has been covered extensively.
However, most of these articles are of empirical character. Hisarciklilar et al.,
(2009) establishes that various studies from different countries largely
contribute to varying data on the same and th us the results from various
investigations
would
thus
differ.
Moreover,
the
outcomes
of
various
investigations have been depended on the forms of investments in the
investigated country. For instance, in the cases where FDI assumes a Greenfield
project, the positive influence on employment is likel y to be higher. Conversel y,
foreign capital inflows are considered to assume privatized business buyouts.
Grinols (1991) has tried to establish some models that try to fit in various
situations and assumptions in order to establish the impact of an increase in FDI
inflows to an unemployed plagued economy.
Karilsson et al., (2009) establish some positive correlation between the size
of the FDI and the employment status in China. China has emerged as one of the
most beneficiaries of Foreign Direct Investments and thus Karilsson et al.,
(2009) illustrates that the country has greatly gained from the huge capital flows.
The research argues that the growth in the employment rates in china has been
greatl y inspired by ca pital intensity, and high production rate experienced in the
country over the last few years. Moreover, employment has been experienced to
be on the rise in the Chinese domestic firms. The authors relate such growth to
the positive spillovers from FDIs.
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
Pei & Esch (2004) observe the influence of the Foreign Direct Investment on
the developing economies. Their study begins with a micro -level by observing
the corporate and banking sectors of these economies. They then investigate the
macro-level employment factors such as balance of payments, and trade. The duo
establishes that FDI has a great impact on the economic statuses of such
economies, though the actual influence on employment is not easy to establish.
However, most of the other literatures observed s eemed inconclusive on the
same.
Despite a considerable number of studies on FDI and its impact on economic
growth of the host countries, the pragmatic outcomes still deliver an unclear
picture of this relationship. ( see, Adeniyi et al., 2012; Rehman 2016; Kherfi and
Soliman 2005; Nazhat 2009). However, most works of literature recoganize FDI as
a sustainable growth vehicle and its positive spillover effects, like employment
opportunities, skills transfer, technology advancements, raising competition and
improving human capital in the host nation ( Chowdhury & Mavrotas 2005; Ajayi
2016).
Another factor that has been investigated by most scholars relating to the Foreign
Direct Investment is the civil conflicts and unrest. Most scholars have thus tried to
analyze the main fuel for intrastate conflicts observed in most developing states and
regions. Collier et al., (2009) on their study in the main causes of civil unrest found
that high inequality, low capita income, poor economic development, ethnic divisions,
and other population differences as being related to such conflicts. As Blanton &
Apodaca (2007) observe in their study, lack of FDI may result to stunted economic
development, and this translates to low per capita income which was aforementioned.
However, FDI and civil unrest equally influence each other, as most foreign investors
shy away from states that undergo through civil unrest. Some previous researches in
the past have tried to investigate why rebel and terrorist groups form in these
economies and the results range from grievances to greed (Collier et al., 2009)
Given the above literature, it is evident that FDI effect on economic growth on
the host countries can be positive, negative or inconclusive based on the
recipient countries condition . In the same vein, various studies are carried out at
an individual country level on the nexus between economic growth and FDI (see
Lamine & Yang 2010; Tsen 2010; Insah 2013; Nazhat 2009 among others). Also
at the continental and regional level (see Adeniyi et al., 2012; Chowdhury and
Mavrotas 2005; Kherfi and Soliman 2005; Jyun and Chin (2006) among others.
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Among all the works of literature reviewed, there is no single study conducted on
the West African continent with regards to ECOWAS. This leaves a lacuna for
study so as to embrace the impact of foreign direct investment on economic
growth of West African State, a board data of 15 West African State in the period
of 2001-2015.
Despite the extensive discussions observed on Foreign Direct Investment,
the existing literatures and theories have been observed to present some
conflicting outcomes in relation to economic growth. With some scholars
arguing that FDI could influence technological advancement through the
embracement of foreign know -how and thus improving t he economy of the
hosting states, some other scholars argue that FDI can easily result to
overcrowding on the domestic investment, destructive competition, dependency
on foreign funding and external vulnerability.
However, all the literature works have be en observed to have a common
definition of the FDI framework. The definition largel y agreed is that foreign
direct investment refers a form of investment that is made in order to gain some
management interest in an enterprise that carries out its activitie s in a state that
is not investor defined in relation to residency. The voting stock right common in
all literatures observed is 10%. The research articles viewed express some
opinions that illustrate various perspectives ranging from systematic pessimism
to unreserved optimism.
Beginning with Caves (1974) in his pioneering research established that
there exists a positive relationship between MNE productivity and value added
that FDI resulted to economic growth on situations where the states improved
their knowledge on stocks through skill acquisition and labor training.
Noorzoy (1980) established that the developing host nations can utilize the cash
flows to overcome the shortages in their investment capital. Moreover, when FDI gets
attracted to some expensive or risk by ventures in the host country such as petroleum
mining, the domestic investment become attracted to related industries. Therefore,
FDI eventually becomes an important factor for controlling the balance of payments
due to increase in exports. Some of the arguments that have emerged to support the
above models include Shan (2002) and also Sun (2000). These studies have used panel
data and convectional regression model. Therefore, Sun (1998) discovered a high
positive relationship between industrial output and FDI in China. On the other hand,
Shan (2002) employed the VAR model to also examine on industrial output and FDI
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
and other national variables. He also established that there also existed a correlation
to the Chinese economy in the event in which the ration of FDI and the output by the
industries increased. Zejan (1994) conversely believed that there was a positive
relationship between growth and FDI when the country was wealthy. This is only to
the extent in which the national wealth could sufficiently influence growth. However,
he established that there could be a threshold level in which national wealth could not
spur growth regardless of the FDI levels.
Alfaro et al., (2003) established that FDI could only spur economic growth in
only states or regions that had well established financial markets. However,
Balasubramanyam et al., (1996) argued that trade openness greatly influenced the
performance of FDI in relation to economic growth.
Despite the above works of literatures and et cetera that advocate for some
positive correlation between FDI and economic growth, the optimists have not gained
unanimous fortification in the recent years. the pessimist perception regarding the
same that developed in the 50s to the 60s has been defended by in dustry level research
studies which pinpoint on crowding effect on local investments, dependency, poor
absorptive potential, external vulnerability and worsening of the balance of payments
as being the main weaknesses. Moreover, these literature pieces hav e pointed on
‘market stealing’ and destructive domestic and foreign competition as being some of
the unwanted repatriations of FDI.
Aitken & Harrison (1999) established that the benefits of beneficial spillover to
the domestic firms could not be found in Venezuela during the 70s and 80s. In
addition, Haddad & Harrison (1993) could not establish any positive relationship
between FDI and growth in the developing nations. However, it can be argued that
there study was based on Morocco.
Therefore, it appears that the study on the relationship between FDI,
technological advancement, output growth, and capital acquisition is a very
controversial subject theoretically than it is in practical sense (De Mello, 1999). When
Lipsey (2004) conducted a research that was basically macro-empirical, he
established that the relationship between growth and FDI inflows did not at all exist.
He therefore argued the researches needed to put forward the various considerations
undertaken in regard to the beneficial spillovers.
Therefore, the existing controversies in the topic explain why there are so little
studies on the same on the last decade. The findings of each study must thus be
observed from a skeptical angle since the existing literatures did not take any
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significant efforts in controlling any risings in simulative bias, industry related effects,
and country bound effects. Most of the articles found have routinely employed lagged
dependent research variables and thus contributing to the major problems. The
weaknesses observed are greatly viewed to have caused bias to the coefficient
estimates and the standard error coefficients. Therefore, there is a great compulsion to
review the existing evidence using econometric procedures that would guarantee the
removal of all potential biases in the study.
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
Chapter 3 AN OVERVIEW OF ECOWAS
This chapter presents an overview of the Economic Community of West African
States (ECOWAS). It contains information on the entire region, the formation process
of ECOWAS, characteristics of ECOWAS, socio-economic characteristics of
ECOWAS, supply and demand impact of capital investment in the region, and lastly
economic performance of the ECOWAS.
3.1 Introduction of the Region
West Africa is located in sub-Saharan Africa, the region is defined by chains of
extended countries that bordered Atlantic ocean with exception of Burkina Faso. West
Africa is the second fastest growing rregional economy in Africa, geared by growth in
Nigeria and Ghana. These two nations have received more than half of capital
investment coming to the region, the impact of such investment is more felt in the two
countries compared to others within the region. However, Senegal and Cote d’Ivoire
are likely to gain in more investors’ attention continuously due to their stable political
and steady growth respectively.
Despite the high potential of growth, the region remains underdeveloped for
decades, this is unconnected with the skewed nature of investment in the region. Most
of the foreign investment coming into the region are geared towards the oil and gas
sector, mining sector, service sector and financial sector with little or no attention on
manufacturing and real sector of the economy. Large market and profit are the major
motivation for investment in the region.
West Africa is the second fastest growing regional economy in Africa, in 2014 it
experienced a GDP growth rate of about 6%. While Nigeria and Ghana have anchored
this growth to date, countries such as Cote d'Ivoire, Burkina Faso, Niger, and Liberia
are expected to play an increasingly important role, as Cote d’Ivoire is turn to be the
third fastest growing economy in Africa by 2016. West Africa is not a secure region to
do business but is improving in this regard. Significant gaps in energy provision and
infrastructure hamper productivity in West African economies. Human capital
limitations make it difficult to find skilled local labor and high costs of living,
especially in Nigeria, make maintaining a local presence costly. Investor’s especially
foreign investors, are highly attracted to economies based on the ease of doing
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business, and key indicators have shown that there has been a significant
improvement on the ease of doing business in the region, this is expected to attract
high capital inflow.
3.2 Background of ECOWAS
Prior to the establishment of the integration, the collective territory was made up
of a collection of states that had amalgamated from different colonial experiences and
presidencies which largely defined the boundaries of the 15 states domiciled in the
area west to the African continent.
In 1972 there was a proposal for a union of West African States to serve as a
collective union of former colonies to promote economic prosperity among member
nations. That year, the Nigerian head of state Gen Yakubu Gowon and his Togolese
counterpart Gnassingbe Eyadema visited the region in support of the integration Idea.
The drafts emanated from their efforts served as the basis for the emergence of the
Treaty of Lagos in 1975 which gave birth to ECOWAS. The treaty of Lagos was
originally flaunted as an economic initiative, but emerging political events led to its
revision and there with the expansion of scope and powers in 1993 (ECOWAS, 2016).
ECOWAS consists of 15 member nations, such as Benin, Burkina Faso, Cape Verde,
Cote d’Ivoire, Gambia, Ghana, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal,
Sierra Leone, and Togo.
ECOWAS was intended to nurture regional economic and political coopera tion.
History potentates this claim. Since the pre-colonial era, West Africans have been
among the world's most mobile populations although much of the movement has been
intra-regional. Up to date, about 7.5 million West African migrants (3 percent of the
regional population) are living in ECOWAS countries other than their own. The 1.2
million other migrants are spread mainly in North America and Europe. Estimated at
about 149 million in 2013, women constitute over 50 percent of the region’s
population. The cross-border migration of women as traders and business persons
places them as potential champions for promoting integration (ECOWAS, 2016).
There are seven principal objectives of ECOWAS;
(1) Elimination of customs duties
(2) Abolition of quantitative and administrative restrictions on trade
(3) Establishment of a common customs tariffs and common commercial policy
(4) The abolition of free movement of persons, services, and capital
(5) Harmonization of agricultural and industrial policies
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
(6) The establishment of a fund for cooperation and lastly
(7) Harmonization of monetary policies.
It is very clear that most member countries sign the treaty without prior
knowledge of the full implication of set objectives and problems that may enter due to
full implementations of the set objectives (Olofin, 1977).
In the process of actualizing its stated objectives, ECOWAS encountered some
problems. These include political instability and bad governance in some member
countries,
the
inability
to
diversify
national
economies,
inadequate
and
underdeveloped infrastructures, and language asymmetry among members. These
factors make it difficult to handle any crisis, especially for those arising from
religious and ethnic inclination (Ibadan, 2013).
Just like other economic integration, ECOWAS aimed at creating a strong front
that attracts economies and foreign investment from the global share of FDI.
Realizing the importance of FDI in growth and development made west African
nations, not an exclusion in attracting the capital investment into the economy of its
member nations. Nigeria is the highest recipient of FDI inflows among the ECOWAS
countries within the period of investigation. Nigeria received about 72.1 percent of
the total inflows of FDI followed by Code d’Ivoire with nearly 6.6 percent, while the
lowest share went to Guinea Bissau with a meager 0.1 percent (UNCTAD, 2015).
3.3 Characteristic of ECOWAS member states
Almost all the countries in ECOWAS got their independence in the 1960s except
Ghana, Guinea, Cape Verde, Guinea Bissau, and Liberia. These countries have had
military personnel attempted to take over the government at least once. For example,
Nigeria has had the highest number of coup d’état among ECOWAS member states,
and 6 out of the 15 attempts succeeded. Political uncertainty, as opposed to political
stability, affect foreign investment potential in any country. It is undoubted that the
executive political power that is the president affects international relations. Some
presidents and political powers form good rapport with foreign investors when
political differences is regarded. However, political uncertainty creates an
environment that allows foreign investors to question the integrity of security within
that particular country. Furthermore, local investors also lack confidence in making
investments in their own state. These allusions can be viewed at an angle that political
stability drives peace, while political uncertainty creates the possibility of change of
executive power. In most cases, when there is political uncertainty change of power
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often creates tension which is not favorable for investment. In the long run, the
economy becomes contracted.
Nigeria’s total area is less than Mali and Niger, but its population is higher than
the entire population of other ECOWAS members. Majority of ECOWAS population is
between the ages of 15 to 64 years. Most of ECOWAS member states’ populations live
in the rural area except Cape Verde, Gambia, and Liberia. Like other parts of the
continent, ECOWAS member states continue to face many development problems,
which include low literacy rates, high unemployment rates, and high HIV/AIDS
prevalence among adults. These problems constitute a heavy burden for ECOWAS
countries and hence deter their development. For example, the literacy rate in Burkina
Faso, Niger, and Ghana is below 30.0 percent as compared to Togo, Cape Verde,
Ghana, Liberia, and Nigeria that are above 50.0 percent (2015 World Facebook of
central intelligent agency). In general, the rate of economic growth and development
among ECOWAS member states is still low.
A considerable population of ECOWAS countries lives in the urban area where
major economic activities took place although the economies utilized 60% of its
population in agrarian agriculture, mobility to urban area is rampant during the
post-harvest, however, concentration in the urban area produced a market for most
investor as well as cheap labor for industries.
One key factor considered by foreign investors is the market potential of any
region. Nigeria, for example, happens to be the most populous nation in the ECOWAS
region. It attracted most foreign investment because the market is readily available .
Activities of most MNCs are highly motivated by cheap labor in the host communities.
Such activities lower the average cost of production, which in turn causes more output
and lower unit price and eventually more sales.
One can deduce from the above that inflow and outflow of FDI in one way or the
other affect the decision of most investors, no one will invest in an economy where a
considerable population of the country is illiterate (Majeed and Ahmad, 2008), or not
employable or mostly unskilled. Even the locals will prefer to invest outside his own
domain if the demographic nature of the country is not favorable, the growth ambition
of any nation cannot be realized in case the population is crippled. This is because a
healthy labor force is required for the growth of a nation.
3.4 Socio-economic characteristic of ECOWAS
In general, in the ECOWAS region, the industrial sector is less developed than
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
other sectors. That can be seen from its contribution to GDP. However, agriculture
contributed significantly to the GDP of some member countries while employing most
of their labor force. For instance, the Agriculture sector contributed about 62.7%
percent to Liberia's GDP as of 2010 while in Cape Verde, services industry
contributed 74.3 percent to its GDP as of 2017. Primary exports among ECOWAS
members state are agriculture products while for Cote d'Ivoire, and Nigeria it is
petroleum. Cote d'Ivoire and Nigeria are on oil and gas producing countries. Other
industries among ECOWAS members include power generation, bus and truck
assembly, construction materials, shipbuilding and repair, food items, beverages, and
timber products. Food, capital equipment, vehicle parts, and fuel are the primary
imports of ECOWAS member states. There is a trade between ECOWAS an d countries
like France, Germany, USA, Netherlands, China, Japan, Belgium, and Ukraine. Trade
also takes place among ECOWAS member states, for instance, Ghana, Togo, Gabo
Verde, and Mali (World Bank Development Indicator, 2013)
Nigeria is the most significant player in the ECOWAS economy. Nigeria's gross
domestic product by purchasing power party is more than rest of the ECOWAS
member states combined. Nigeria's consumption of electricity is five times higher
than the rest ECOWAS member states combined. Cote d'Ivoire is the second largest
oil producer of the region after Nigeria and the ECOWAS member states with current
account surplus. Eight countries among ECOWAS member states have adopted CFA
franc as their new currency, and the rest are using their own c urrency (CIA world
Facebook, 2010).
3.5 Supply impact of investing capital in the region
The impact of investing industry in West Africa cannot be overemphasized. Forty -six
impact investors are active in the region, including 14 development finance
institutions (DFIs) and 32 other investors. This study includes informati on on direct
impact investments made by 11 DFIs and 26 non-DFIs in the region totaling USD 6.8
billion between 2005 and mid-2015. Within the same period East Africa accumulated
a total of USD 9.3 billion in impact investment, however, this was achieved while
region's GDP was less than half that of West Africa. DFIs have deployed 97% of the
total impact investing capital in West Africa. Since 2005, DFI investment has
increased to a compound annual growth rate of 18%, from USD 190 million in 2005 to
USD 852 million in 2014. More than half (54%) of all impact capital of the ECOWAS
region is deployed in Nigeria and Ghana. Nigeria, which accounts for 80% of the
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region's GDP, has received the most tremendous amount of impact capital (29%), as
investors are interested in a large and growing market. Ghana has received a nearly
same share of impact investment (25%), despite accounting for only 5% of West
Africa's GDP. It is due to the business-friendly policies of Ghana. Senegal and Cote
d'Ivoire together account for a further 21% of impact capital deployed.
3.6 Demand impact of investing capital in the region
Development in West Africa is slow yet the population is growing. As per Human
Development Index, most countries can be confirmed well below global averages.
This is factual since the countries are still fighting poverty and inequality. There is,
therefore, a need to finance small and medium-sized enterprises as well as social
enterprises. For the most part, enterprises lack awareness of financing options,
struggle to meet banks and investors’ requirements, lack professional operation and
governance mechanisms, and face high costs of operation which hampers profitability.
3.7 Economic performance and structure of the region
The main perceived opportunities are in the key sectors of energy, FinTech, and
agriculture. Geographically, Nigeria is and will continue to be the primary market of
interest, while Senegal and Cote d'Ivoire are gaining investors' attention due to high
levels of political stability and steady growth. Respectively, some investors also
perceive opportunities in Ghana, while others expressed some skepticism regarding its
prospects due to current economic volatility. Further opportunities lie in strengthening
linkages between local and foreign investors and enterprises to draw in more funding,
and in utilizing blended finance, combining subsidized funding and investment to
crowd the private investment. Energy, manufacturing, infrastructure, and financial
services have attracted the most impact investment capital. DFIs invested 65% of their
portfolios in energy, manufacturing, and infrastructure. Non -DFIs invested heavily in
financial services, with most of this capital invested in micro finance institutions. It
has been observed that the interest of more than 300 citizens of ECOWAS nation is
being served through the speedy execution of sectoral programmers for wealth
creation. The integration has successfully adopted macroeconomic converge nce report
provided by ECOWAS convergence council.
The region has also successfully launch system applications and product
component of eco-link aims at improving the financial management systems and
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
ensuring real-time information for effective decision making in the community
institutions. It has also successfully formulated common trade policy CTP and
ECOWAS trade development strategy. Free movement of person and goods has
boosted the economy of the host nations such as Nigeria (ECOWAS, 2016) . In terms
of structure, ECOWAS comprises three branches of power, i.e., the executive branch,
the legislative and judiciary, the fourth specialized branch is the ECOWAS bank for
investment and development (EBID), which looks into the economic affairs of the
community in addition to the communities outside the banks as well. The head of the
organization is the chairman of the authority of heads of states and government who is
appointed by other head of states to oversee the affairs for a period of one year.
The two main institutions were the ECOWAS Commission and the ECOWAS Bank
for Investment and Development (EBID), which were created to implement policies,
pursue a number of programs, and carry out development projects in Member States. The
vision of EBID is to become the leading regional investment and development Bank in
West Africa, an effective tool for poverty alleviation, wealth creation and job promotion
for the well-being of people in the region. The changes can onl y be realized if everyone
in the community gets involved.
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Chapter 4 RESEARCH METHODOLOGY
4.1 Introduction
This chapter primarily introduces the methodology used in this study. This
chapter is organized as follows. Section one introduces the chapter. Sect ion two
explains the method of data collection. Section three contains a detail explanation of
variable measurement. Model specification is presented in the fourth section while in
section five the methods and techniques of data analysis are explained. The final
section explains the estimation procedure.
4.2 Method of data collection
Since the research intends to use secondary data throughout, the major source of
data is obtained from the websites of international agencies and organizations. The
data has a panel structure collected on variables of interest in 15 countries that make
up ECOWAS. The series was retrieved from two different sources, firstly from the
World Bank data bank/ world development indicators, and secondly from the central
bank of individual countries. This is mainly because the whole series could not be
found in a single source and need for data cleaning. On each country, fifteen
observations are collected on each variable, the cross -section sums up to 15, while the
total observation sums up to 225. This research covers a period of fifteen years from
2001 to 2015. The period chosen for the study encompasses the years when significant
reforms were introduced in ECOWAS member countries to improve foreign direct
investment (FDI) inflow.
4.3 Variables measurement
The variables we are measuring for this study are divided into dependent and
independent variables.
Growth Domestic Product (GDP) This is used to indicate the market value of the
output of the economy and is usually used to express the country's economic growth.
It shows the impact of FDI on economic growth. furthermore,
Real GDP is obtained
after taking care of inflation. Real GDP is used in this research as an index for
economic growth, following the general convention in the empir ical study of
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
economic growth (see Hermes and Lensink, 2000; Ragimana, 2012, Imoudu, 2012;
Oloyede 2014).
Foreign Direct Investment (FDI) can be understood in simple terms when an
entity directly controls ownership of about 10% of an entity in a foreign c ountry.
Foreign inflow, therefore, means that investors directly channel their capital resources
in foreign states. The investment type can be conglomerate, horizontal or vertical.
When FDI is regarded as conglomerate, it mean that a company takes control of a
different company abroad but both companies do not conduct the same line of
operation in terms of the nature of the businesses. In horizontal FDI, a company takes
control of another in a foreign country but this time only different activities are run.
Finally, for vertical FDI, investment is made to run control or run a company and all
the activities of the host company are similar to that of that in foreign country. It is
expressed as a function of as (FDI) GDP (Hermes and Lensink, 2000; Ragimana,
2012, Imoudu, 2012; Oloyede 2014).
Financial Development (FD) can perceived as a strategy adopted for the
development of the private sectors in bid to contain poverty and achieve economic
growth. It is, therefore, a cocktail of elements such as institutions, operating
framework policies that strengthen financial markets. Financial development is a
proxy for economic growth in the sense that stronger markets attract rapid foreign
investments. This is due to the fact that such markets contain competent industri es
that adopt modern technology in production. The grand effect is that the unit cost of
production is such a market will reduce against the high -quality output. Investing in
such a market will, therefore, be reliable. Measuring of financial developments s hould
be based on the capacity or amount of circulating credit in relation to GDP. This,
therefore, implies that financial development should not be expressed directly as GDP.
Financial development in this study is measured by private sector bank loans to real
GDP (Hermes and Lensink, 2000).
Gross Capital Formation (formerly gross domestic investment (DI)
It consists of outlays on additions of the economy plus net changes in the level of
inventories Fixed assets include land improvements ditches, drains, fence, and plan
machinery equipment, construction of roads, railways and schools, hospitals, private
residential, commercial and industrial buildings. Inventories are stocked goods held
by firms to meet temporary or unexpected fluctuations in production or sales and
work in progress. Domestic investment in this study is measured as a ratio of GDP
(Ragimana,2016).
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MASTER'S THESIS
Trade Openness (TO) be defined as outwards and inward of a country's given
economy. Outwards orientation refers to an economy that takes significa nt advantage
of opportunities to trade with others countries. Inwards orientation refers to an
economy that it’s overlooked, taken or an unable to take advantage of the
opportunities to the trade with other countries. Trade openness in this study is
calculated as the ratio of the summation of export and import to GDP (Ragimana,
2012; Imoudu, 2012).
Dummy Variable for
Civil unrest and Political strife is defined as 1 and 0
otherwise.
Unemployment (UNEMP) ) represents the number of people in the workforce
who want to work but do not have a job. It is stated as a percentage and calculated
by dividing the number of people who are unemployed by the total workforce.
In general, the choice of the variables was the outcome of a large body of works
of literature and theories reviewed. Each of the variables is directly or indirectly
related to one or more of the theories highlighted.
4.4 Specification of Model
To examine the impact of FDI on the economic growth of ECOWAS member
countries, the study adopts a static panel regression model specification. This study
utilizes a heterogeneous panel cointegration test and long-run form of the pooled data.
Newly-developed method of panel unit root is utilized to arrive at a robust estimate.
The model for this study is an adaptation of Otene and Richard (2012) in their
analysis of capital flight and Nigeria’s economy. The functional representation of the
model for this study is as follows
RGDP=F (FDI, DI, FD, TO, UEM, Dummy)
The above functional relation can be written in an equation as below;
ln( RGDPit )   0   1 ln( FDI it )   2 ln( FDit )   3 ln( DI it )   4 ln( UMEM it )
  5 ln( DUM it )   6 ln( TOit )   it
Where
Lnrgdp is the natural logarithm of real GDP of an individual country at time ,
Lnfdi is the natural logarithm of foreign direct investment
Lndi is the natural logarithm of domestic investment
Lnunem is the natural logarithm of unemployment
39
万方数据
(4.1)
The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
Lndum is the natural logarithm of civil unrest
Lnto is the natural logarithm of trade openness
 0， 1，
， 6 Are the parameters of regression to be estimated.
 it is the uncorrelated disturbance term
From the foregoing model, the long run model based on the individual effect of
real GDP on each independent variable is computed as well as pairwise Granger
causality test. In the absence of long-run causality, the research investigates the short
run causality among the variables under consideration
4.5 Estimation techniques
4.5.1 Panel unit root
Recent development in the field of applied econometrics suggests that
panel-based unit root test tends to be more powerful and robust than time series
individual unit root. Many statisticians propose different methods of computing unit
root test in panel data (lm, Pesaran and Shin 2003; Levin, Lin and Chu 2002; Choi
2001; Breitung 2000; Hadri 2000 and Fisher-type test using ADF and PP tests,
Maddala and wu (1999)). For the purpose of this study, this study intends to use a
Fisher-type test that adopts ADF and PP test and Hadri test. The essence of
considering unit root in panel analysis as observed by Baltagi (2005) and Entorf
(1997), is that whenever time frame of data approaches infinity with finite variables,
spurious regression set in an inference based on t-values computed can be highly
misleading.
4.5.2 Fisher-type test using ADF and PP Tests
One special feature of the Fisher-type test as observed by Whitehead (2002) is
that it considers a unit root test on each panel’s series separately, then combines the
p-values to obtain an overall test of whether the panel series contains unit root by
utilizing the Choi (2001) methods. It has an advantage over Lm, Pes aran and Shin
(please add the citation) in that it doesn’t require a balanced panel, it also uses
different leg lengths in the individual ADF regressions. Consider a separate ADF
regression specify for each cross section below,
yit  yit 
pi
  t
ij
t j
  xit   it
(4.2)
j 1
The null hypothesis for the above test can be written as; H 0 :  I = 0 for all while the
40
万方数据
MASTER'S THESIS
alternative hypothesis is given by
(1)  I = 0 for all i= 1, 2, 3, …,N
(2)  I < 0 for all
i= N +1,N +2, …,N
If  I is defined as the p-value from any individual unit root test for cross-section,
under the null of the unit root for all N cross-sections, the asymptotic result is
obtained as follows
N
 log( )  
2
i
2
2N
(4.3)
i 1
In addition, Choi demonstrates that
1
N
N

1
i  N (0,1)
(4.4)
i 1
Where -1 is the inverse of the standard normal cumulative distribution function.
4.5.3 Hadri unit root
The second test considered by this study is the Hadri test of pa nel stationarity.
Hadri test is similar to the KPSS unit root test and has a null hypothesis of no unit
root in any of the series in the panel. The test considers the residual from the
individual regression of series under investigation. Consider the equat ion below.
 it =  I +  I t +  it
(4.5)
Given the residual from the individual regressions, LM can be formed and later
be integrated into Z statistics.
. LM 
1
Nf 0
N
1

2
i 1 T
T
t
t 1
2
st
(4.6)
Where is t 2 .The cumulative sums of the residuals, from the above Hadri,
formulated the following Z-statistics.
Z= N (LM-)  N (0, 1)
(4.7)
Where  =1/6 and  = 1/5.
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
4.5.4 Heterogeneous panel cointegration test
The cointegration approach in time series analysis, in which regression of
variables of the same order of integration that can produce stationary series can be
extended to panel series, although the coefficients and other related statistical tests
are totally different from those of times series cointegration models. In panel data
alike there can be the long-run relationship among macroeconomic variables under
panel investigation (Pedroni 2000; 2004). Baltagi (2005) is of the view that panel
cointegration models are directed towards finding the sound long-run economic
relationships typically encountered in macroeconomic variables. Such relationships
are explained by the economic theory, though the estimation of regression coefficients
and testing them are against theoretical restrictions.
Consider the following panel regression adopted and modified from Kao and
Chiang (2000),
y it = x it  + z it  +  it
.(4.8)
where y it are 1x1,  is a k ×1 vector of slope parameters, z it is the deterministic
component and  it are the stationarity disturbance terms, x it are k ×1 integrated
processes of order one, and
x it = x it-1 +  i
(4.9)
The assumption of cross-sectional independence is maintained under these
specifications, equation 7 describes a system of cointegrated regressions, y it is
cointegrated with x it .
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Chapter 5 Data Analysis and Discussion of Findings
5.1 Introduction
This chapter presents data analysis and discussion of findings. The chapter
contains a brief introduction, panel unit root test and Pedroni panel cointegration to
determine the long run relationship or otherwise, followed by the long run estimate
using fully modified OLS and dynamic OLS. The result of Granger causality was also
presented.
5.2 Panel unit root test
Table 5.1 below depicts the result of the panel unit root test to ascertain whether
the series under consideration are stationary at the level or after taking the first
difference. Data of each variable was converted to log base ten. The famous fisher's
ADF and PP test as well as had panel unit root test are used, and the result obtained is
depicted below.
Table 5.1 ADF Unit Root Test Results
Variables
Fisher
Choi
HADRI
lnrgdp
32.1221
0.45412
-0.5191
(0.1420)
(0.6751)
(0.0000)
54.4535
-4.4832
6.50412
(0.0000)
(0.0000)
(0.6981)
38.7353
-1.0626
4.73128
(0.9210)
(0.1440)
(0.0000)
68.2520
-5.1488
7.97889
(0.0000)
(0.000)
(0.06102)
30.2052
-0.6852
3.70457
(0.2592)
(0.2466)
(0.1101)
63.0517
-4.4635
5.94635
(0.0001)
(0.0000)
(0.0000)
43.8184
-1.5765
-2.9195
(0.2901)
(0.0575)
(0.0018)
△lnrgdp
lnfdi
△lnfdi
lnto
△lnto
lnuemp
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
Variables
Fisher
Choi
HADRI
△lnuemp
141.983
-8.4815
-0.46207
(0.0000)
(0.0000)
(0.6780)
30.2052
-0.6852
2.0927
(0.2592)
(0.2466)
(0.0182)
63.0517
-4.4683
5.94635
(0.0001)
(0.000)
(0.0647)
2.03677
1.15777
1.58369
(0.9163)
(0.8765)
(0.0566)
2.54261
0.17810
0.34904
(0.0063)
(0.0052)
(0.3635)
29.4139
-0.4224
2.10013
(0.2926)
(0.3364)
(0.0179)
61.4043
-4.3266
6.35336
(0.0001)
(0.0000)
(0.2456)
lndi
△lndi
lnfd
△lnfd
lndum
△ldum
Source: Author ’s Computation. Values in parenthesis are probability values that led to
rejection or otherwise of the null hypothesis. Signifies the first difference of a series.
The null hypothesis under fisher's ADF states that a series has a unit root
(meaning that it is not stationary), while the reverse is the case under Hadri panel unit
root test. However, rejection or otherwise of the null hypothesis is based on 1% and
5% level of significance. In this regard, probability value appearing in parenthesis is
utilized to make a decision on whether a particular series is stationary or not. Real
GDP is not stationary at a level under both tests because the null hypothesis of a unit
root in ADF test cannot be rejected. When the null hypothesis in Hadri panel test is
rejected (after taking the first difference), it becomes stationary. Hence, real GDP is
an integrate of order one. FDI is not stationary at a level going by both tests, but its
first difference becomes stationary at 1%. In the same vein, trade openness is
integrated of order one because its original form has a unit root but the first difference
is stationary.
In a
nutshell, unemployment, domestic investment, financial
development, and social and civil unrest are all stationary only after first difference,
conclusion resulting from unit root test shows that all the series under investigation
are integrated of another one.
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Table 5.2 Pedroni Panel Cointegration Test
Test statistics
Statistic Values
Probability
Panel v-STATISTICS
-0.608990
0.0287
Panel rho-statistics
4.061046
0.0230
Panel PP-statistics
-7.348279
0.0457
Panel ADF-statistics
-5.381968
0.0560
Group rho-statistics
5.875751
0.0170
Group PP-statistics
-9.884459
0.0000
Group-ADF-statistics
-4.885202
0.0000
Table 5.2 above presents the result of Pedroni panel cointegration test.
Precondition for applying Johansen (1989), Engle and Granger, Pedroni (2000) test of
cointegration requires that all series under investigation should be integrated of order
one, meaning that they should be stationary only after first difference not second,
although Paseran and shin (2001) refuted that assumption and believe that mixture of
I(1) and I(0) can still be cointigated. The result from unit root test in table 4.1
indicates that all the series under investigation are integrate of order one. This allows
for Pedroni test for panel cointegration. Pedroni test as depicted above reports seven
statistics to ascertain cointegration, for each test, the null hypothesis is either be
rejected or otherwise, as appears in the table, all the test statistics reject the null
hypothesis of no long-run relationship. By Pedroni approach, the long run relationship
between economic growth, FDI, financial development, domestic investment,
unemployment, trade openness, and social unrest is found. Economic implication of
such long-run relationship exerts a considerable influence on one another. The
movement produces a causal effect and distortion which can be corrected through
adjustment mechanism. In the long-run, the effect identified is pooled data of the
whole region, however, the co-movent of the variables affect the individual economy
in ECOWAS nations.
Table 5.3 below depicts the panel long-run estimators using fully modified
ordinary least square and dynamic OLS, this help in identifying the direction and
magnitude of the relationship established earlier. Economic gr owth proxy by real GDP
is the dependent variable, while FDI, financial development, domestic investment,
trade openness, unemployment, and dummy are the regressor.
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
Table 5.3 Panel long run estimators
FMOLS
DOLS
VARIABLES
Coefficients
Probability
Coefficients
Probability
LNDI
0.014429
0.0432
0.256726
0.0586
LNFD
-0.016007
0.9286
-0.073644
0.7098
LNFDI
0.105987
0.0180
0.231937
0.0075
LNTO
0.540895
0.0000
0.457845
0.02547
LNUNEM
0.432015
0.0234
0.754678
0.00245
C
-0.55462
0.1239
-0245787
0.06412
There is a positive and significant relationship between economic growth proxy
by real GDP and foreign direct investment at 5% significance level. A 1% increase in
FDI will approximately raise growth by 0.014% in ECOWAS countries. A similar
result was recorded for dynamic OLS though the significant level is 10%.
Unemployment is negatively related to economic growth though not statistically
significant. This is in line with theories that allude to a natural rate of unemploy ment
even if there is full employment. Therefore, with unemployment in the ECOWAS
region, economic growth can still be achieved because it is natural that unemployment
will exist be it voluntary or involuntary unemployment. Financial development is
positively related to economic growth (0.105987) and significant in explaining the
growth in ECOWAS countries. A percentage raise in financial development will
increase growth by 0.11% in the region, to some considerable extent, financial
development has impacted on the economy of the region. There is a positive and
significant relationship between domestic investment and economic growth. In
dynamic regression, a percentage rise in domestic investment will increase growth by
0.46%. The magnitude of domestic investment is larger than that of FDI as expected.
Domestic investment has really impacted on the economy of ECOWAS countries. This
is unconnected with the entrepreneurship spirit in the region in which individuals are
striving to detach themselves from a government job. Financial development has also
helped in this regard. Trade openness exerts a positive influence on economic growth
and is statistically significant at 1% level. This is consistent with a priori expectation
as well as trade liberalization policy of the integration. Social unrest is negatively and
significantly related to economic growth. This is true going by the violence and
terrorist activities currently in the region.
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MASTER'S THESIS
5.3 Panel Granger causality test
Table 5.4 Panel Granger Causality Test Results
Null Hypothesis:
Obs
F-Stat
Prob.
LNDI does not Granger Cause LNGDPG
182
1.0320
0.3584
3.5265
0.0315
3.6306
0.0285
0.0341
0.9664
0.2211
0.0019
LNGDPG does not Granger Cause LNFDI
0.4144
0.6613
LNGDPG does not Granger Cause LNTO
0.4039
0.6683
2.2086
0.1129
3.3411
0.0376
0.5026
0.6058
5.5335
0.0047
0.5131
0.5995
1.6513
0.1947
20.839
7.E-09
1.4005
0.2492
7.3213
0.0009
2.1391
0.1208
0.5419
0.5826
1.0266
0.3603
2.4659
0.0878
12.027
1.E-05
0.8661
0.4224
8.1297
0.0004
0.9854
0.3753
3.6920
0.0269
1.8835
0.1551
9.3234
0.0001
10.3863
5.E-05
5.6398
0.0042
LNGDPG does not Granger Cause LNDI
LNFD does not Granger Cause LNGDPG
182
LNGDPG does not Granger Cause LNFD
LNFDI does not Granger Cause LNGDPG
182
LNUNEM does not Granger Cause LNGDPG
182
LNGDPG does not Granger Cause LNUNEM
LNFD does not Granger Cause LNDI
182
LNDI does not Granger Cause LNFD
LNFDI does not Granger Cause LNDI
182
LNDI does not Granger Cause LNFDI
LNTO does not Granger Cause LNDI
182
LNDI does not Granger Cause LNTO
LNUNEM does not Granger Cause LNDI
182
LNDI does not Granger Cause LNUNEM
LNFDI does not Granger Cause LNFD
182
LNFD does not Granger Cause LNFDI
LNTO does not Granger Cause LNFD
182
LNFD does not Granger Cause LNTO
LNUNEM does not Granger Cause LNFD
182
LNFD does not Granger Cause LNUNEM
LNTO does not Granger Cause LNFDI
182
LNFDI does not Granger Cause LNTO
LNUNEM does not Granger Cause LNFDI
182
LNFDI does not Granger Cause LNUNEM
LNUNEM does not Granger Cause LNTO
182
LNTO does not Granger Cause LNUNEM
Table 5.4 above depicts the panel Granger causality test. There is one -way
causality running from GDP growth rate to domestic investment. This implies that
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
GDP growth is causing domestic investment and not vice versa. Financial
development is causing GDP growth or economic growth and not contrary and is
statistically significant at 5%. FDI is Granger causing the economic growth of the
table above, and FDI causes economic growth and not vice versa and is significant at
5% level. There is unidirectional causality running from trade openness to growth rate
of GDP. There exists unidirectional causality running from unemployment to GDP
growth rate and is statistically significant at 5%. Financial development does Granger
cause domestic investment and not vice versa. There is no causality between foreign
direct investment and domestic investment. Likewise, between trade openness and
domestic investment, the result is indeterminate. There is unidirectional causality
running from unemployment to domestic investment. There is no causality between
FDI and financial development. Also, there is no causality between trade openness
and financial development. There is one-way causality running from unemployment to
financial development. There is also one-way causality running from foreign direct
investment to trade openness, while there is unidirectional causality running from FDI
to unemployment. The result also reveals that trade openness does Granger cause
unemployment but not vice versa at 1% level of significance. Meanwhile, going by
the result of the Granger causality test, the multivariate regression can be conducted
through seemingly unrelated regression (SUR).
Table 5.5 SUM Regression Result (RGDP as the dependent variable)
Variables
Coefficients
Standard error
t-statistics
probability
LNDI
0.013675
0.003706
3.689498
0.0003
LNFD
0.126202
0.004328
29.16082
0.0000
LNFDI
0.155637
0.003957
39.32809
0.0000
LNTO
0.105890
0.002070
51.16006
0.0000
LNUNEM
-0.185707
0.005257
-35.32622
0.0000
C
-0.456299
0.020407
-22.35938
0.0000
R-squared
0.929900
Adj R-squared
0.928182
S.E. of reg
1.001374
F-statistic
541.2234
Prob(F-statistic)
0.000000
D-W statistics
1.994846
Jaquebera stat
5.990050
(0.08249)
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MASTER'S THESIS
Table 5 above shows the result of multivariate regression computed using level
data by adopting seemingly unrelated regression. The data is in log form and there is a
positive and significant relationship between GDP growth rate and domestic
investment. A unit raised in domestic investment will enhance economic growth in
ECOWAS countries by 0.013675. As expected domestic investment has positively and
significantly impacted on the economies under investigation. Financial development
impacted positively on the economic growth of the countries and statistically
significant at 5% level of significance. There is a positive and statistically significant
relationship between foreign direct investment and growth rate of GDP in ECOWAS.
This is in line with the economic theory that the inflow of the foreign direct
investment has significantly improved economic performance in the region. In the
same vein, there is a definite and statistically significant relationship between trade
openness and economic growth. Opening borders for member counties has
significantly impacted on economic growth of the member nations. There exists a
negative and significant economic relationship between unemployment and economic
growth. This makes unemployment a peculiar phenomenon to any economy, whether
developed or developing.
In order to determine the adequacy of the regression model, R square is checked.
The result show 93% explains the variation independent variable resulting from
independent variables. From our estimate 0.929900 variation in growth rate of GDP in
ECOWAS countries was explained by domestic investment, financial development,
foreign direct investment, trade openness, and unemployment, therefore as expected
the R-square is high. The overall adequacy of the model was measured by F-statistics
as revealed. The model is legitimate because the probability value is less than 5%.
Durbin-Watson statistics shows that the residual of the model is free from
autocorrelation as the statistics approach 2. Jaquebera statistics shows that the
residuals ware normally distributed although at 10% level of significance.
5.4 Discussion of findings
Empirical results show that there is a long-run relationship between FDI,
financial development, domestic investment, unemployment, trade openne ss, and
economic growth. Such result is ascertained by Pedroni test of cointegration while
previous unit root result shows that all variables were stationary at first difference.
Long run notion in economic analysis implies co-movement of variables as such they
can affect one another or cause distortion, which will converge later in the long run.
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
The economy produces adjustment mechanism either automatically or through some
austerity measures. The economy of ECOWAS is subject to adjustment whenever
there is distortion in equilibrium. The result of long-run form indicates the magnitude
and direction of the relationship between growth and variables under investigation, in
which FDI is the variable of interest, for instance, is positively and significantly
related to economic growth in ECOWAS region. This finding is similar to many other
studies on the nexus between economic growth and FDI ( Insah 2013; Chowdhury &
Mavrotas 2005; Ajayi 2016; Adeniyi et al., 2012; Chowdhury and Mavrotas 2005;
Kherfi and Soliman 2005; Jyun-Yi & Chin-Chiang 2006).
Estimates from FMOLS and DOLS indicate conformity with a priori
expectation and economic theory. Economic growth, for example, is positively
related to domestic investment in ECOWAS countries . This is in consonance with
economic theory, domestic investment should produce output, employment and
income in the economy and generally lead to prosperity. The financial
development also produce s the desired result
development
ceteris
paribus,
the
more
that the more financial
econom ic
prosperity.
Although
unemployment negative relates to the economy, it is insignificantly related to
economic growth. In other words, a large number of unemployed youths have a
negative impact on the economy,
since they are supposed to be fully engaged in
paid employment.
As was expected, there is a positive and significant relationship between GDP
growth rate and domestic investment. Financial development has impacted positively
on the economic growth of the countries and statistically significant at 5% level of
significance. It indicates that there is a positive and statistically significant
relationship between foreign direct investment and the growth rate of GDP in
ECOWAS. This is in conformity with economic theory. The inflow of the foreign
direct investment has significantly improved economic performance in the region.
Likewise, there is a definite and statistically significant relationship between trade
openness and economic growth. Opening borders for member countries has
significantly impacted on economic growth of the member nations. This study,
therefore, concludes that FDI plays a significant and positive impact on economic
growth of ECOWAS countries. These findings corroborate the previous findings
regarding the impact of FDI on economic growth (Khan and Khan, 2010; Anyanwu;
2011; Nasreen et al, 2011; Garge et al., 2012; Adeniyi et al., 2012; Sichei and Kinyon,
2012;
Igbal et al., 2013; Lian and Mu, 2013).
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Conclusion
This study assesses the effect of FDI on financial development, trade openness,
unemployment, and civil unrest in ECOWAS countries using data spanning across 15
years from 2001 to 2015. The data used was attained from the World Bank's national
accounts data, OECD national data files, International Financial Statistics,
International Labour Organization, and World Bank international debt statistics. The
variables on which data are gathered include real GDP, foreign direct investment,
unemployment rate, trade openness, domestic investment, and financial development
indicator. The panel unit root test, Pedroni cointegration test, FMOLS, DOLS
multivariate regression, and Granger causality,
techniques are used for data analysis.
The static panel regression involves the use of a multivariate regression technique for
data estimation.
It has been established in our computation that long run relationships exist on
variables under investigation into all ECOWAS countries. The behavior of the series
was similar for all countries.
There exists a positive and significant relationship between eco nomic growth and
financial development in line with a priori expectation that financial development
should positively impact on economic growth. As expected there is a significant
positive relationship between domestic investment and economic growth in the
countries under investigation. It is also found that there is a positive impact of
domestic investment in enhancing the economic growth of those countries and the
result is statistically significant at 1%. From the estimate, trade openness seems
favorable to the economic growth of ECOWAS countries. It positively and
significantly affects the economy at 1% level of significance. The result of
unemployment and economic growth has proved the economic theory since it shows a
negative and significant relationship. A unit rise in unemployment will reduce output
by 0.157%.
As for the robustness of the model, 72% of the variation in GDP growth rate is
explained by financial development, domestic investment, foreign direct investment,
unemployment and term of trade. The model is free from autocorrelation because the
Durbin-Watson statistics is 2.0250 so we cannot reject the null hypothesis of no
autocorrelation.
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
There is unidirectional causality running from financial development to GDP
growth rate. Domestic investment Granger causes growth rate of GDP and not reverse.
The null hypothesis that FDI does not cause financial development was rejected at 5%
level of significance. Domestic investment does granger cause FDI but not in the
reverse direction, which is significant at 5% level.
Based on the empirical analysis it can be inferred that the level of foreign direct
investment in the selected ECOWAS member country has significantly influenced the
level of their economic growths. Where as the determinants of their economic growths
were the volume of domestic investment, financial development, trade openness,
unemployment rate and the presence of civil and political unrest exert a significant
impact.
As found in the empirical analysis, economic growth responds negatively to
changes in financial development in the respective countries. It indicates that the
financial system of these countries is not developed enough to enhance the economic
growth of the countries. It further explains that the volume of domestic investment in
the respective countries has driven some of the economies’ growth . Majority of these
economies have limited number of multinational companies, so a more significant
percentage of the economic activities have been undertaken by local investors and
nationals of the economies.
The unemployment rate has been found to be negatively affecting the economic
growth of ECOWAS member countries. This finding is not contrary to the a priori
expectation. Increasing level of unemployment increases the rate of dependenc y on
the economy, and aggregate economic growth reduces. Thus, the level of economic
growth is likely to reduce.
Trade openness has been found to be one of the factors enhancing the economic
growth of the selected West Africans Countries. This is economic ally logical, given
the backward nature of these economies regarding technological advancement.
Considering the positive impacts on international trade, it is e xpected that economies
which are more open to international trade should grow faster economicall y as their
transfer of human, natural and economic resources and goods and services.
Based on the findings of this study, some policy suggestions are proposed as
follows
i.The Government of each of these ECOWAS member countries and their
respective financial authorities should put in place appropriate policies and an
environment conducive enough to increase the level capital inflow and reduce capital
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MASTER'S THESIS
outflow in their economies. These policies could be the adoption of business -friendly
interest rate, rehabilitation of dilapidated infrastructures, and provision of regular
power supply among others.
ii.The governments in ECOWAS member states should develop policies that
improve the database management of the economic sector, identify strategies to curb
capital flight, increase the technological efficiency of the sector for proper monitoring
and control of funds from FDI.
iii.The abundance of human resources should be judiciously utilized through
skills acquisition and development programs with adequate financial support in order
to make the economy conducive for foreign investments.
iv.ECOWAS member countries adjust gradually to the primary product - based
export to more capital based products to bring the level of economic growth of their
respective economies to a sustainable level. Specifically, the manufacturing sector of
each economy needs to be developed such that product with high economic and
monetary value be produced and exported to foreign countries to increase foreign
earnings substantially.
v.In general, ECOWAS member countries need to collectively put measures in
place to enhance foreign direct investments as a way of strengthening regional
economic development and to use collective efforts to bring regional economic
growth to a sustainable level as it has been seen in other regions such as the European
Union.
Limitation of the Study
Due to the nature of research question and limited used of alternatives. In the
course of this work the following limitations were encountered.
1. The increasing cost of carrying on a research work in a developing country
like West African imposed a great limitation to this work.
2.The incorrect nature of secondary data also imposed a limitation to the finding
of this work based on the fact that is very difficult to collect data of 15 Wes t African
countries at one source, it enables us to collect data from more than five source. With
the significant variables the study show how West African countries tend to reach the
extent of making changes or an improvement on their regulations and make
restrictions on mobility of capital, where some of the countries must introduce
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The effect of Foreign Direct Investment on financial development, trade openness, unemployment and civil unrest of member in ECOWAS
structural adjustment policies that will ensure the positive impact on economic growth.
With the significant variables it are going to show how West African countries tend to
reach the extent of making changes or an improvement on their regulations and make
restrictions on mobility of capital, where some of the countries must introduce
structural adjustment policies that will ensure the positive impact on economic
growth. Understanding of econometric techniques is difficult for me, so I have to
study more and more literatures that are empirical. I work hand in hand with my
supervisor and consult a lot of people who are professional in the field for advice.
Contribution of the Study
The result of our study provides a clear and better understanding of the impact
that FDIs exact on economic growth of West African states. From our findings, one
can easily say that FDI has positively impacts on the growth of the West African
economy and statistically significant implying that ECOWAS region is yet to benefit
fully from the enormous potential in FDI inflow into their countries. This can be
attributed to the inability of government to attract a reasonable volume of FDI
significant enough to drive the whole economy to the desired direction. It is
understandable from our findings that if FDI inflow is increased to a reasonable extent
it has the potential of stimulating economic growth and development in ECOWAS
member’s countries. Based on this, government should provide an enabling
investment environment that will encourage smooth inflow of foreign investment into
the country.
The result of our study further portrays that Economic growth respond by the
changes in financial development in the respective countries, domestic investment has
been responsible for the growth witnessed in ECOWAS member’s countries economy
over the period under review. This provides an understanding that domestic
investment is a major factor that contributes to the gro wth of the Nigerian economy.
And so, more emphasis should be geared towards encouraging domestic investment to
drive the economy to the desired level of growth. Unemployment also is the major
problem in ECOWAS nations as it prove that is not negatively and statistically
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affecting the economic growth of ECOWAS member’s countries. As this finding is
not what we are expectation, and clearly show Government of these countries need to
do something on this sector. Trade openness contributed but in some selected W est
African countries because of the backwardness on technological advancement in the
region. The study further contributes to the emerging literature on FDI -led
growth, growth driven -FDI and FDI-productivity hypotheses and its causality
linkages in the ECOWAS region. It provides vital and timel y information and
recommendations given the difficulties that the country is facing in terms of
attracting FDI as well as maximizing its benefits. The findings will assist policy
makers in formulating favorable gover nment and FDI policies important for the
country’s growth and development prospects. The study also contributes in
providing evidence-based information on the importance of FDI in various
sectors of the economy useful for its major development partners suc h as China,
England, American and other investors across the world.
The findings provide a new study evidence on the analysis of FDI and Financial
Development, Trade openness, unemployment and civil unrest in West African
countries through a model synonymous to the one used by other authors but in a
modified form.
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Acknowledgment
This study would not have been completed without the guidance, support, and
help of several people and I wish to acknowledge them accordingly.
Firstly, I owe an enormous debt of gratitude to three the most important people in
my life, one is my father Senator Idrisu Samaho who have finance my studies from
beginning to end. My elder brother Hon Hambali Shitu Samaho he was the initiator
and was responsible for my coming to China to study. Also, my elder brother
Bilyaminu Shitu Samaho, he is the one who stands with me throughout the difficult
time, he understands me better and understands the pains o f going throughout the
period of my studies.
Secondly, I would like to express my gratitude to my supervisor professor ZHU
Huiming. Many thanks also to School of Business Hunan University the
encouragement and support. I did not forget the effort of Sultan Mehmood who helped
me on editing parts of my thesis and his advice. My appreciation also goes to my
course mate Masters class of 2015, and my friends at Hunan University especially,
Amr Ahmed saleh.
Thirdly, I wish to extend my genuine appreciation to my friends in Nigeria Engnr
Amar Sa’ad, Ibrahim Bello Bankole, Usman Yahaya Banaga, Abdulmutallab Abubakar,
Bashiru Aliyu, Anas Nura, Sabiu Usman, Yahaya Adamu Yakson, Abdulrahman Shitu,
Abdulrahman Shiitu Black, Suleiman Isah Lastdon, Nabil Abba Bello, Afeez ,Zayyanu
Shitu Perez, Balkisu Mustapha Labaran, Safiya Yusuf, and Hadiza Mustapha, Maryam
Mu’azu Aliyu whom always pray for me and shown concern throughout the journey.
Finally, my special thanks go to all members of Senator Idrusu Samaho family,
and that of Dan Unguya and Rashi for their prayers and support for my education, the
family that is always embracing the value of education. I hope this makes you proud .
HUSSAINI SHITU
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