FOREIGN DIRECT INVESTMENT, INSTITUTIONS AND INDUSTRIALISATION IN SUB-SAHARAN AFRICA

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ABSTRACT

This study aims at establishing the role that inward foreign direct investment (FDI) and institutions played in the industrialisation process of 40 sub-Saharan African countries, over the period of 1996 through 2015. The study used a fixed effect method (FEM) of estimation for the analysis of data which was sourced from the world development indicators (WDI) database of the world bank and the world governance indicators (WGI) database, also of the world bank.

The findings of the study based on the model employed show that inward FDI played a neative role in the industrialisation process of the countries under study. That is to say FDI was detrimental to industrialization. Institutions were however important in the promotion of the manufacturing sector of these countries. Good institutions provide a good business climate that enable the growth of the industrial sector of Sub- Saharan African countries. Other findings from the study showed that Agriculture and Export had a negative relationship with Industrialization, whereas, Imports had a positive relationship with Industrialization.

CHAPTER ONE INTRODUCTION

This chapter gives a general background of the research topic. It further elaborates on the purpose, objective, research questions, significance, scope and limitations of the study. Then, a summary of the remaining chapters of the research work is finally given.

     Background of the Study

The African continent has been lagging behind in terms of development, over the past several decades, compared with the rest of the world. Most African countries have failed to diversify their economies, and they usually engage in primary sector activities. These economic activities do not bring the countries much value, as regards the creation of jobs and value added final products (United Nations Economic Commission for Africa, 2013).

Industrialisation is the movement of an economy from a mainly primary sector base to a manufacturing base. Kuznets (1973) also defines it as the structural changes experienced by less developed countries in the transition from an agricultural to an industrial economy, which comes along with societal changes. Industrialisation is widely recognised as a necessity for the development of the African continent. Most developed countries all went through this process in the development of their nations. Some economists have thus hypothesised a theory which states that the industrial sector is the engine of growth in an economy. This is referred to as the “engine of growth argument” (Kaldor, 1967; Cornwall, 1977). Recent empirical studies also confirm

industrialisation as the major driving force of economic development. (Rodrik, 2008; Szirmai and Verpagen, 2011).

Industrialisation however requires high levels of financial investments and technology. Most African countries lack the financial strength and technical resources to industrialise their economies. It is therefore imperative that they attract external sources of financial and technological support, through foreign direct investment (FDI) in their bid to catch up with the industrialised world.

Foreign direct investment (FDI) in Africa has been on the rise for several decades. It rose by as much as 40% between 2014 and 2015. Policy makers and governments have played a major role in this increase in foreign investment inflows. Most countries receiving inward bound FDI provide very generous tax and investment incentives for the investors. Foreign direct investment has now become one of the major sources of finance in developing economies (DenisiaTheories have shown various effects of FDI in a host economy. Dahlman, (2009) and Di Maio, (2009) show that FDI played a pivotal role in the transformation of the economies of some East Asian countries into industrial economies.