The causal relationship between Foreign Direct Investment (FDI) and the macro-economy of selected west African countries: Panel ARDL/Granger Causality Analysis

Abstract

This study examined the long run and short run dynamic relationships between macroeconomic variables and FDI in West Africa using recent econometric techniques for Granger non-causality and PMG/ARDL for period of 1990 to 2016. Controlling for the influence of trade openness and exchange rate, the long-run effect of Foreign Direct Investment (FDI) on economic growth and gds are found to be positive and statistically significant. FDI is found to be negative and statistically significant on unemployment indicating that an increase in FDI would significantly reduce unemployment in the selected West African nations in the long-run. The coefficient of error correction model in all the specifications is negative and significant indicating that the short-run disequilibrium is corrected in the long-run. Panel Granger causality tests result indicates that causality do not run from any direction in the short run which could be attributed to poor economic activities among this developing countries and an important revelation for policy implication.Keywords/Phrases: Foreign Direct Investment (FDI), West Africa, PMG/ARDL, cointegration, Granger causality, macroeconomic variables

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