Impact of Foreign Direct Investment on Trade of African Countries

It is not uncommon to see African countries struggling to address their foreign currency shortage. FDI is presumed to play a role in addressing this problem. With this in mind, the main objective of the study is to determine the relationship between FDI and trade balance (import and export) of African countries for the period 1980 to 2007. Due to data heterogeneity, non-continuity and because the Hausman test favours it over the Random effect technique, Least Square Dummy Variable (LSDV) regression method is used. The elasticities of both export and import for FDI stock is +0.043266 and +0.031987 respectively and are statistically significant. This indicates that the positive impact of FDI on balance of trade through export promotion is more than offset by its negative effect of boosting import as these countries are highly import dependent. Investment policy makers in those countries should direct foreign investors towards those areas involving export promotion, import substitution and local factor intensive investments.