The role of foreign direct investment (FDI) on economic growth in Sub-Saharan Africa: does governance matter

Abstract

This study investigates the relationship between Foreign Direct Investment (FDI), governance, and economic growth in Sub-Saharan Africa, employing an econometric model based on panel data from 38 Sub-Saharan countries spanning the period 2000-2023. The study incorporated key Gross Fixed Capital Formation (GFCF), population growth, exports, imports, and government effectiveness to answer the research questions. Diagnostic results, including unit root tests for stationarity, Johansen cointegration tests for long-run relationships, confirmed the robustness of the data and the selected methodology. The study finds that the interaction of governance and FDI demonstrates a statistically significant negative impact on GDP growth, attributed to governance challenges and institutional inefficiencies. In contrast, population growth and exports positively influence economic performance, while imports show a detrimental effect. The study recommends that policymakers in the region strengthen governance frameworks and diversify FDI to maximize developmental outcomes.