The impact of sector Foreign Direct Investment on economic growth in developing countries

Abstract

One of the key priorities of developing countries governments and policymakers is to improve national welfare and address poverty alleviation. Foreign Direct Investments (FDI) are regarded as important external sources of financing economic growth around the world and are a more stable and beneficial capital injection substitute to financial aid in developing countries (Adam, 2009; Özkan-Günay, 2011). More recently, there has been a surge in foreign investments into developing countries as investors seek to diversify their investments in order to receive better returns which have become difficult to attain in the developed countries due to market saturation and the effects of the 2008 global financial crisis. The challenge that developing governments are faced with is how to ensure that the FDI inflows into their countries result in accelerated economic growth. Contemporary literature suggests that one of the reasons why FDI has produced contradictory results in various countries and economies is that FDI in various economic sectors impacts economic growth differently (Madem, Cudla & Rao, 2012). The main objective of this study was to evaluate the impact of sectorial FDI on economic growth in developing countries. Panel data estimation techniques were employed to estimate the impact of various economic sectors on economic growth as measured by Gross Domestic Product (GDP). Further, an analysis was performed to estimate whether there is a better form of FDI which is preferable to enhance FDI driven economic growth. The sample data used for this study was for South Africa as convenience sampling technique was employed. The study established that there is statistically significant evidence that sectorial FDI has variable impact on economic growth and as such priority should be directed to investments in economic sectors with the greatest impact on economic development. Further, it was established that greenfield as a form of foreign investment does not have statistically significant impact on economic sectors’ ability to impact economic growth. As such there is no preferred form of FDI to enhance economic growth as measured by GDP.