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Articles

June 2013 Volume 5, No.1

FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN ECOWAS: A SYSTEM-GMM APPROACH

  • ALEGE, Philip O. (Ph.D)
  • OGUNDIPE Adeyemi A.
Submitted
February 22, 2016
Published
2016-02-25

Abstract

The paper investigates the relationship between foreign direct investment and
economic growth in ECOWAS using the System-GMM panel estimation technique covering the
period 1970-2011.The study adopted System-GMM in order to overcome the weaknesses
perceived in the empirical works of earlier studies; majority of these studies failed to control for
the presumed challenges of endogeneity inherent in the FDI -Growth argument. The study
likewise interacted human capital and institutions indicators with other explanatory variables in
explaining the variability of FDI. The results of the System-GMM appears contrary to earlier
studies, as the contribution of FDI was insignificant and impacts negatively on growth in
ECOWAS despite the controlling for the role of human capital and quality of institutions in the
model. Following this outcome, policy makers in developing Africa needs to exercise cautions in
adopting the recommendation from earlier studies; most of which advocates more openness,
human capital development and the strengthening of institutions. This might not be completely
helpful considering the pattern of FDI inflow into ECOWAS, which is absolutely resourceseeking. There is need to curtail excessive openness in the extractive industries, encouraging
more manufacturing FDI and domestic investment of repatriated capital by ensuring more
economic stability and raising domestic interest rate.