Unlocking Africa's potential: The transformative power of foreign direct investment for sustainable development

Abstract

In the context of developing economies, Foreign Direct Investment (FDI) has long been acknowledged for its potential to stimulate economic growth. However, with the evolving understanding of development encompassing not only economic prosperity but also environmental and social well-being, the impact of FDI on sustainable development has become a subject of increasing importance and complexity. To shed light on this multifaceted relationship, our study empirically investigates the causal link between FDI and sustainable development in a panel of 48 African economies spanning the period from 1990 to 2020. We employ a robust measure of sustainable development, Adjusted Net Savings (ANS), as well as an innovative Sustainable Economic Growth (SEG) index that encompasses the three core pillars of sustainable development. FDI is measured both as FDI net inflow as a percentage of GDP and as the stock of FDI as a proportion of GDP for robustness testing. Our analytical approach utilizes the GMM-PVAR model. Our findings reveal a noteworthy unidirectional negative causality running from foreign direct investment to sustainable development across African economies. Intriguingly, the magnitude of this adverse impact is more pronounced in low-income nations, while a favorable causal effect of FDI on sustainable development is observed in high-income countries within the region. Importantly, these results hold true across various measures of sustainable development and different metrics of foreign direct investment. As a result, our study offers valuable insights for policymakers in Africa and beyond. Recognizing the nuanced impact of FDI on sustainable development, we propose tailored policy recommendations that take into account the income level of countries to maximize the benefits of foreign investment while mitigating potential adverse effects. Moreover, we advocate for ongoing research and policy innovation to further align FDI with the broader goals of sustainable development on the African continent.

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