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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
The Impact of Foreign Direct Investment on GDP Growth in East Africa
Author(s)
Worku R. Urgaia
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DOI:10.17265/1537-1514/2017.11.002
Affiliation(s)
Addis Ababa University, Addis Ababa, Ethiopia
ABSTRACT
This study empirically investigates
the impact of foreign direct investment (FDI) on GDP growth in East Africa. The
study employs annual panel data, obtained from the United Nations aggregate database
for the selected countries in the region over the period 1970-2015. Unlike time
series and cross-sectional, panel dataset reduces the identification problems in
the presence of endogenous variables and estimates more robust and efficient parameters. This study uses
methods of panel autoregressive distributed lag and random effect models combined
with time scaling wavelet decomposition analysis in order to show a panel of short-,
medium-, and long-run effects
for the entire region and individual countries. Flowing FDI into developing countries
is one of the most dynamic resources which play an important role in economic development
by supplementing domestic savings in capital accumulation, creating innovation and
income growth, transferring modern technology and employment generation, and providing a means
for creating stable and long-lasting economic growth. Examining the correlation between FDI and economic
growth, cannot identify the direction of causation using traditional approaches
such as dynamic panel ARDL. However, the time scaling wavelet decomposition method
can help to recognize the dynamic causality in time horizons. The Granger causality of wavelet analysis in a panel
indicates that there are bi-directional dynamic relationships between real GDP and
FDI in the short, medium, and
long run. According to the empirical evidence, the long-run estimated coefficients
reveal that a one percentage increase in FDI significantly increases the real GDP
by approximately 0.16 percent in a panel of seven East African countries.
KEYWORDS
FDI, economic growth, dynamic panel ARDL, time scales wavelet decompositions
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