Trade Openness and Foreign Direct Investment in Africa

Abstract

It is a public knowledge that developing economies especially those in Africa are striving to attract FDI into their countries since it contributes immensely to economic growth. Nonetheless, the region has not seen the desired level of foreign investment anticipated to spur their growth even though governments have taken several measures and implemented policies aimed at attracting investors. Several factors have been found to be the determining factors of FDI around the world. To this effect, the study relied on the imperfect markets theory, eclectic paradigm and to determine the relationship between trade openness and FDI in 43 African countries over 18 years by employing Arellano and Bond’s Generalized Method of Moments (GMM). Specifically, the study examined the relationship between tariffs and FDI as the first objective, regulatory trade barriers as the second objective and finally the relationship between black market exchange rates and FDI as the third objective. The study found that reducing tariffs, relaxing some of the regulatory trade barriers, ensuring official exchange rates in the region is tantamount to attracting foreign direct investment. The study recommends that African governments would take steps to reduce both tariffs and other non-tariff barriers to trade since this is a major impediment to FDI.