Abstract

ABSTRACT:

Poverty in Africa has long been a big concern that tremendous worldwide anti-poverty efforts have been poured into African countries. Suggested by the Big Push theory, outside capitals, such as foreign direct investment (FDI), foreign aid and concessional debts, should be encouraged to flow into poor countries to stimulate capital accumulation. This paper aims to examine if foreign aid and concessional debts can significantly attract FDI inflows to underdeveloped African countries. The study sample covers fifty African countries during the period 1993-2011. This study highlights the heterogeneity problems existing in the recipient countries, which varies with each other in terms of income levels, financial creditworthiness, and institutional conditions. For this reason, the sample countries are divided into two groups, IBRD and IDA countries, according to the World Bank's lending categories. Based on the F-test, Breusch-Pagan test, and Hausman test results, the random effects model is more efficient than pooled OLS and fixed effect model in the panel data analysis. In addition, this study applies GMM methodology to address the endogeneity problem existing in panel data analysis. Based on the Hansen test results, lagged FDI inflows and exogenous variables are justified to be introduced into the SYS-GMM as instruments. As expected, the main results generated from the analysis for IBRD countries and IDA countries are fairly diverse. Results developed by random effects model show that foreign aid and concessional debts have significant positive effects on FDI inflows for IDA countries. Neither foreign aid nor concessional debts are significantly related with FDI inflows for IBRD countries. The GMM generates similar results for IDA countries. In addition, the results suggest that previous FDI inflows have significant impact on current decisions. Hence, as suggested by the results, foreign help and capital resources should be diversified and allocated according to development levels of different countries. Foreign aid and concessional loans should be encouraged to invest in IDA countries so that FDI can be attracted to flow into recipient countries. For IBRD countries with higher level of development, economic growth plays a more important role in attracting FDI inflows.

pdf

Share