Impact of Foreign Direct Investment on economic growth: Examining the role of Absorptive Capacity

Abstract

The study examines the impact of foreign direct investment (FDI) on economic growth in 11 Sub Saharan African (SSA) countries from 1990 to 2022. Also, the study examines the interaction effect of absorptive capacity on the association between FDI and growth. The paper employed the Driscoll and Kraay standard errors approach, Westerlund's cointegration method, and Breitung's unit root test. The labor force, FDI inflows, FDI outflows, trade openness, and tertiary school enrollment have a positive and significant influence on economic growth in the selected SSA countries. However, the interaction terms between foreign direct investment net inflow and tertiary school enrollment, as well as foreign direct investment net outflow and tertiary school enrollment, show negative coefficients, indicating that higher levels of tertiary school enrollment reduce the positive impact of FDI net inflow and FDI net outflow on growth, and vice versa. Therefore, the study recommends that more FDI net inflow be encouraged, that tertiary school enrollment be improved, and that the quality of tertiary education be enhanced.