Background
This study examines the effects of foreign direct investment (FDI) on sectoral growth and poverty reduction in Africa. The transfer of technology into different sectors of economy through FDI has enabled many developing and emerging economies to achieve sustained economic growth and development. However, this is not the case with Africa’s growth architecture and poverty levels. A look at the region’s growth and welfare structure revealed that the FDI-growth-welfare relationship is weak when compared with those of other developing continents such as Asia and Latin America.
Methods
The study adopted recent causality method and simultaneous equation as well as dynamic threshold models to analyze the effect of FDI on sectoral growth and poverty. We accounted for sectoral spillover effect, heterogeneity, simultaneity and cross section dependence in our modeling.
Results
Main findings from our results suggest that FDI promotes outputs of manufacturing and service sectors, but hinders that of agricultural sector, while it fosters human development. Also, the results showed that, while human development promotes output of the agricultural sector, it deters output of manufacturing and service sectors. Further results revealed that only agricultural output improves human development and welfare among countries. The dynamic threshold regression analysis showed that FDI promotes output growth in all sectors with larger effect at levels beyond the optimal HDI.
Conclusions
Africa’s growth architecture is weak to stimulate poverty reduction. For the region to improve its sectoral output growth and welfare using the FDI as a catalyst, a policy framework towards attracting more FDI into the three key productive sectors (especially in the manufacturing and services) is desirable for increased output and poverty reduction. However, to achieve the desired level of poverty reduction, policies should be targeted to sectors with inter-sectoral linkages especially between agricultural and manufacturing sectors along the local and international value chain.