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Essays on FDI and welfare dynamics in Africa

Kaulihowa, Teresia (2017-03)

Thesis (PhD)--Stellenbosch University, 2017.


ENGLISH SUMMARY : Industrialisation for broad-based development and economic transformation remains Africa’s overarching priority. This dissertation examines the dynamics of how Foreign Direct Investment (FDI) translates into social welfare functions. A three, stand-alone papers structure is followed within the ambit of this dissertation. A set of welfare indicators, such as multifactor and non-monetary poverty measures, is employed to examine the welfare benefits/losses arising from FDI activities. The welfare aspect of society is a multidimensional phenomenon; however, most previous studies have employed a one-dimensional approach or income-based poverty metric which may not adequately capture the underlying dynamics. This research study addresses the inadequacy of a conventional one-dimensional approach by employing a more comprehensive framework. The first paper aims to examine the welfare impact of FDI in a panel of 20 African countries during the period 2000–2013. The multifactor and non-monetary measures of welfare, as well as the non-linearity of FDI on welfare, are examined. In addition, the Driscoll and Kraay standard errors and the Augmented Mean Group (AMG) estimator by Eberhardt and Teal (2010) that account for cross-sectional dependency, endogeneity and heterogeneity within panel units, have been used. The results suggest that the effect of FDI on welfare exhibits a non-linear pattern, with initial increases in welfare being eroded after a turning point. It has also been found that FDI is ultimately welfare enhancing exclusively via health outcomes. The second paper examines the effect of FDI on disaggregated levels of educational attainment in Africa on different levels of income groupings. An instrumental variable estimation technique within a Generalised Method of Moments (GMM) framework that controls for endogeneity has been employed. Additionally, the Driscoll–Kraay standard errors that are robust to cross-sectional and temporal dependency have been utilised. The findings indicate that FDI has a negative but transitory effect on human capital development. The quadratic term of FDI shows a positive effect, an indication that there is a turning point after which the human capital-augmenting hypothesis is supported. The last paper examines the effect of FDI on income inequality in a panel of 16 African countries for the period 1980–2013. To ensure consistent estimates, a Pooled Mean Group (PMG) estimator by Pesaran, Shin and Smith (1999) was used. Both the non-linear effect and heterogeneity were controlled by using a PMG estimator. There is robust evidence that the relationship is non-linear and a U-shaped effect of FDI on inequality is documented. The results reveal that FDI improves equal distribution of income in the countries that have been examined. However, this effect diminishes with further increases in FDI. Policy implications that emanate from this study indicate that FDI can be used as a policy instrument to address Africa’s developmental agenda. However, optimal efficacy of FDI differs across various indicators of economic welfare. Although FDI may be growth enhancing, Africa is still faced with a challenge of ensuring that the resulting FDI-induced growth leads to inclusive development. Therefore, FDI is not a panacea, but has the potential to serve as a catalyst for inclusive and sustainable economic development.

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