FOREIGN DIRECT INVESTMENT, OPENNESS AND EXPORT PROMOTION IN SUB-SAHARAN AFRICA By Nyambati R. Aori Paper to be presented at Center for the Study of African Economies (CSAE) Conference, Oxford University, March 17 th -19 th, By Nyambati R. Aori Paper to be presented at Center for the Study of African Economies (CSAE) Conference, Oxford University, March 17 th -19 th, 2013.

KEY OBSERVATIONS As summarised in the study: o EP regime seems superior to the IS regime o The FDI-Growth relationship in SSA is robust o FDI-Growth relationship also explains current rapid technology inflows to SSA o FDI inflows to SSA are tech & Capital intensive, and less market-seeking o IS regimes only seems to encourage FDI inflow to countries with less advantages leading to extra profits and rent-seeking activities 2

ANALYTICAL FRAMEWORK: The IS versus EP Regimes IS REGIME  Retardation rather than promotion of economic growth  Target Sectors are Capital Intensive where host nations may not have Comparative advantage  Low R&D spillovers EP REGIME  Improved productivity & gains maximisation  Potential for economies of scale  Availability of cheap labour and abundant raw materials  Low cost of starting & running a business 3

THE MODEL o A Model to investigate the interaction of FDI and Trade Policy in SSA is derived from the production function framework o An Aggregate P function can be stated as: Y=ƒ(A,L,K)………(i) A proxy variable for TP can be given as: A=G(FDI, FDI*TP)……………(ii) 4

Cont. o By substituting (ii) in (i) above: Y=F(L,K,FDI,FDI*TP)………(iii) o Barro (1999) and others have used the above proxy o Additional proxies used are: i. Ratio of export to Gross Output (OPEN1) ii. Ratio of world prices to domestic price indices (OPEN2) iii. Ratio of total merchandise trade to goods GDP (OPEN3) 5

Cont. 6

DATA AND METHOD OF ESTIMATION o The model is estimated using annual data ( ) o Sources of Data: The World Bank, IMF, UNCTAD & National Bureaus of Statistics o Method: Engle-Granger o Test: Dicky-Fuller o Estimator: Philips-Hansen (1990) 7

RESULTS 8

Conclusion o A case for trade liberalisation seems sensible (c.f EP regime) o Our results are consistent/confirm the ‘Bhagwati’ hypothesis o Restrictive trade regimes may suppress the current growth momentum in SSA o Need for Reforms for accelerated trade in SSA 9

Any Prospects? o Key factors: i. Maintenance of robust macroeconomic performance ii. Accelerated economic reforms iii. Predictable commodity prices iv. Improved investor perceptions of the continent 10

Thank You!! Questions and Discussion 11