THE INTERNATIONAL ENVIRONMENT FOR FOREIGN DIRECT INVESTMENT AND REGIONAL DISAGGREGATION

Get Complete Project Material File(s) Now! »

INTRODUCTION

Countries that do not participate in the process of globalisation, or those having inferior or inadequate policies compared to developed or other developing countries, run the risk of becoming comparatively less competitive in the global economy. It is argued by the World Bank, amongst others, that those countries that integrate faster into the global economy exhibit faster economic growth and vice versa (Abugre, 1997). It is further stated in the United Nations’ Millennium Declaration (2000: 5) that UN members resolve: “To halve, by the year 2015, the proportion of the world’s people whose income is less than one dollar a day…”. However it is estimated that if Africa wants to reduce the number of people living in poverty by 50 per cent by 2015, and thereby achieve the same quality of life as other developing countries, a sustained annual growth rate of above 7 per cent per annum1 is needed and a resource gap of US$64 billion needs to be breached (Abugre, 1997 and Asiedu, 2004: 41).
To reach the goal of faster sustainable growth, poverty reduction, improved living standards and sustainable investment, international confidence in the economies of Africa needs to be boosted. Over the last decade there has been renewed interest in foreign direct investment2 (FDI), due to the changing global economic and political environment. FDI is seen as a means of financing development and of transferring skills, knowledge and technology between regions and countries. It improves the general welfare of the population by providing employment opportunities, improving trade and accelerating growth and development (Asiedu, 2001: 107). As a result of this, the UN’s Millennium Declaration also focuses on increased flows of FDI when stating: “To take special measures to address the challenges of poverty eradication and sustainable development…” in meeting the special needs of Africa.
Increasing private 1 The millennium declaration was adopted by the United Nations in September 2000 (Asiedu, 2004: 41). 2 Foreign direct investment is defined by United Nations Conference on Trade and Development (UNCTAD) as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor’s lasting interest in a foreign entity. flows to Africa, as a way to help to overcome the region’s resource gap, is also emphasised by the New Partnership for Africa’s Development (NEPAD)3 (Harsch, 2003: 12). By studying the trends and determinants of FDI as presented in theories, hypotheses, schools of thought and empirical studies, the factors influencing the occurrence of FDI and who the recipients are, can be examined. Such a study assists in the investigation of where FDI is expected to flow and how it is possible for Transnational Corporations (TNCs)4 to compete in foreign markets. Finally, the challenge for African policy-makers is to direct economic policy to attract increased FDI which will support the resurgence of the African continent.

OBJECTIVE, MOTIVATION AND RESEARCH METHODOLOGY

The primary objective of this study is to identify the determinants of FDI and in turn empirically test these by making use of panel econometric techniques. This is done with a view to providing a tool for enhancing policy in Africa with regards to FDI which would in turn increase Africa’s FDI attractiveness. A further objective is to test neighbouring influences on host5 country FDI flows. The methodology of this study comprises: (i) An analysis of the trends of FDI flows, regional disaggregation of FDI and an investigation into the socio-economic environment of Africa as a determinant for attracting FDI. (ii) An investigation of the theories and case studies on FDI to establish the determinants and hypotheses regarding signs and magnitudes of coefficients as well as functional forms of relationships that influence FDI. (iii) The application of panel econometric techniques to estimate the influence of country- specific as well as neighbouring country influences on FDI. The technique is applied on developing, emerging and African countries. An evaluation and comparison of African countries according to the criteria of determinants of FDI as well as the identification of a set of policy recommendations to improve Africa’s share of FDI flows.

CONTRIBUTION OF THIS STUDY

The majority of studies on FDI flows only investigate certain regions or the determinants between certain groups of countries. Ancharaz (2003: 3) mentions that, although the literature on the empirical determinants of FDI flows in developing countries is wide and varied, the empirical work has not directly and fully addressed the question of FDI-bias against sub- Saharan Africa. However, some recent studies (Asiedu, 2003; Ancharaz, 2003 and Lemi and Asefa, 2003) cast some light on FDI in sub-Saharan Africa. The first contribution made by this study is the estimation and comparison of empirical results for different homogeneous groups of countries or panels – namely a developed country sample, a sample consisting of emerging countries and an African country sample. The second contribution is the empirical estimation of neighbouring influences on the host country, for attracting FDI.

OUTLINE OF THE STUDY

The study is divided into four sections: (1) FDI trends and magnitudes; (2) theories and case studies on FDI; (3) empirical estimation of determinants of FDI and (4) policy implications. The first section is covered in chapter 2, while chapters 3 and 4 deal with the theories and case studies on FDI. In chapter 5 the data sources and characteristics are discussed. Empirically estimated results, using panel econometric methods, are presented in chapters 6 and 7. Policy recommendations for improved FDI flows are discussed in chapter 8 and in chapter 9 a summary is given and conclusions are drawn. In chapter 2 an understanding of the environment of FDI is presented, with specific reference to the flow of FDI to different regions. Special emphasis is placed on the flow of FDI to Africa and the role of socio-economic status of African countries in attracting FDI is also examined. In chapter 3 the theories, hypotheses and schools of thought that contribute to providing a fundamental motivation for the direction and magnitude of FDI flows are summarised. However it is asserted that these theories lack a framework for guiding empirical work on FDI.
Chapter 4 investigates the conflicting empirical literature relating to the determinants of FDI flows. It builds on the discussion of the theories in chapter 3 and investigates how these theories have been applied in empirical research. It guides expectations of signs, magnitudes and economic significance of the explanatory variables. Chapter 5 provides an exposition of the data used in the empirical estimation, as well as a discussion of the panel econometric techniques being employed. It also includes selection criteria for the models, data and countries used. The estimation results of the different samples for the host country determinants of FDI are discussed and compared in chapter 6. The estimation results for the neighbouring influences are discussed in chapter 7. Chapter 8 presents FDI criteria for African countries, based on the relevant theories and the empirically validated determinants of FDI. Policy recommendations are finally made to increase the levels of FDI flows to African countries. The study concludes with a summary and set of final remarks provided in chapter 9.

CONTENTS :

• LIST OF TABLES
• LIST OF FIGURES
• 1. INTRODUCTION AND BACKGROUND
  • 1.1 Introduction
  • 1.2 Objective, motivation and research methodology
  • 1.3 Contribution of this study
  • 1.4 Outline of the study
• 2. THE INTERNATIONAL ENVIRONMENT FOR FOREIGN DIRECT INVESTMENT AND REGIONAL DISAGGREGATION
  • 2.1 Introduction
  • 2.2 The international environment for foreign direct investment
  • 2.2.1 Globalisation and foreign direct investment
  • 2.2.2 The role of Transnational Corporations
  • 2.3 Inflow of foreign direct investment and regional disaggregation
  • 2.3.1 Total external resource flows
  • 2.3.2 Global inflow of foreign direct investment
  • 2.3.3 Foreign direct investment flows to Afric
  • 2.4 The environment for foreign direct investment in Afric
  • 2.5 Industries attracting foreign direct investment
  • 2.6 Conclusion
• 3. THEORIES, HYPOTHESES AND SCHOOLS OF THOUGHT
  • 3.1 Introduction
  • 3.2 Historic development and classification of theories on foreign direct investment
  • 3.2.1 Historical development of theories on foreign direct investment
  • 3.2.2 Classification of theories on foreign direct investment
  • 3.3 Theories of foreign direct investment
  • 3.4 Conclusion
• 4. A SURVEY OF EMPIRICAL RESULTS OF FDI STUDIES
  • 4.1 Introduction
  • 4.2 Confusing and conflicting empirical results in foreign direct investment
  • 4.3 Data and methods
  • 4.3.1 Dependent variable
  • 4.3.2 Independent variables
  • 4.4 Conclusion
• 5. PANEL DATA ECONOMETRIC METHODOLOGY AND AN EXPOSITION OF THE DATA USED
  • 5.1 Introduction
  • 5.2 Panel models
  • 5.3 Data, model and country selection
  • 5.4 An exposition of the dat
  • 5.4.1 Data sources
  • 5.4.2 Theories, hypotheses and school of thought used in empirical estimation
  • 5.4.3 Data exposition
  • 5.4.4 Lessons learned from the dat
  • 5.5 Unit root tests for panel dat
  • 5.6 Conclusion
• 6. EMPIRICAL RESULTS FOR COUNTRY SPECIFIC DETERMINANTS
  • 6.1 Introduction
  • 6.2 Discussion of empirical results
  • 6.2.1 Empirical estimation
  • 6.2.2 Empirical results
  • 6.3 Conclusion
• 7. EMPIRICAL RESULTS FOR NEIGHBOURING INFLUENCES
  • 7.1 Introduction
  • 7.2 Empirical results
  • 7.2.1 Empirical literature
  • 7.2.2 Empirical estimation
  • 7.2.3 Empirical results
  • 7.2.4 Lessons learned of neighbouring effects
  • 7.3 Conclusion
• 8. POLICIES FOR ATTRACTING FOREIGN DIRECT INVESTMENT
  • 8.1 Introduction
  • 8.2 Policies for attracting foreign direct investment to Afric
  • 8.2.1 Environment for attracting foreign direct investment in Afric
  • 8.2.2 First, second and third generation policies
  • 8.2.3 Inconsistency in literature on foreign direct investment and policy implications
  • 8.2.4 Policy for attracting foreign direct investment
  • 8.3 Conclusion
• 9. SUMMARY AND CONCLUSION
  • 9.1 Introduction
  • 9.2 Contribution of this study
  • 9.3 Future research opportunities in this field of study
  • 9.4 Globalisation
  • 9.5 Theories and empirical literature
  • 9.6 Data and results
  • 9.6.1 Dat
  • 9.6.2 Empirically estimated results
  • 9.6.3 Empirical results for neighbouring influences
  • 9.7 Policy implications
  • 9.8 Conclusion
  • BIBLIOGRAPHY

GET THE COMPLETE PROJECT