Effects Of Fiscal Policy On Foreign Direct Investment, Economic Growth And Development In Sub-Saharan African Economies.

ABSTRACT

The study assessed the effect of fiscal policy on net foreign direct investment (FDI) inflows, economic growth and development in sub-Saharan African economies from 1985 to 2019. Fiscal policy was proxied by government capital expenditure, government recurrent expenditure and tax revenue. Data were collected from World Development Indicators (2019) and Central Bank of Nigeria (CBN) Statistical Bulletin (2019). In all the models of the study, the unit root test showed that the variables were integrated of order one (i.e. I(1)) and the Johansen cointegration test showed that there was long run equilibrium relationship among the variables. Thereafter, vector error correction mechanism (VECM) technique was employed in determining the country-by-country effect of fiscal policy on net FDI, economic growth and economic development while pooled effect Ordinary Least Squares (POLS) was employed to determine the aggregate effect. Findings revealed that government capital expenditure had positive and significant effect on net FDI inflows and economic growth in sub-Saharan African economies (p < 0.05). Conversely, the study showed that government recurrent expenditure had negative and significant effect on net FDI inflows and economic growth (p < 0.05).  The study also showed that government recurrent expenditure had positive and significant effect on economic development (p < 0.05). Furthermore, the study showed that tax revenue had positive and insignificant effect on economic growth (p > 0.05) while it positively and significantly increased economic development in sub-Saharan African economies (p <  0.05). However, tax revenue had negative and insignificant effect on net foreign investment (FDI) inflows in sub-Saharan African economies (p > 0.05). In conclusion, the study found that fiscal policy of governments in sub-Saharan African economies significantly affected net FDI inflows, economic growth and development. The study recommended that government capital expenditure should be increased across sub-Saharan African economies especially in Nigeria, Cameroun and Ghana in order to attract more foreign direct investment.

TABLE OF CONTENTS

Title Page                                                                                                                    i

Declaration                                                                                                                  ii

Certification                                                                                                                iii

Dedication                                                                                                                  iv

Acknowledgements                                                                                                    v

Table of Contents                                                                                                       vi

List of Tables                                                                                                              x

List of Figures                                                                                                             xiii

Abstract                                                                                                                      xiv      

CHAPTER 1: INTRODUCTION                                                                              1

1.1       Background to the Study                                                                               1

1.2       Statement of the Problem                                                                               7

1.3       Objectives of the Study                                                                                  10

1.4       Research Questions                                                                                         10

1.5       Research Hypotheses                                                                                      11

1.6       Significance of the Study                                                                               11

1.7       Scope of the Study                                                                                         12

1.8       Operational Definition of Terms                                                                     12

CHAPTER 2: REVIEW OF RELATED LITERATURE                                         14

2.1       Conceptual Framework                                                                                   14

2.2       Trends In Selected Fiscal Policy, FDI and Economic Growth  Indicators

In Sub-Saharan African Countries: Nigeria,   Cameroun, Ghana and

Gambia Perspective                                                                                        20

2.2.1    Trend in government expenditure in Nigeria, Cameroun, Ghana and

Gambia: a comparison                                                                         20

2.2.2    Trends in government expenditure in selected Sub-Saharan

African Countries                                                                                           22

2.2.3    Trends in economic growth rate in Nigeria, Cameroun, Ghana and

Gambia: a comparison                                                                         24

2.2.4    Trends in FDI Inflow (% of GDP) in Nigeria, Cameroun, Ghana and

Gambia: a Comparison                                                                                    27

2.3       Theoretical Review                                                                                         29

2.3.1    Managerial theory                                                                                           29

2.3.2    Savers-spenders theory                                                                                   30

2.3.3    Marginal efficiency theory                                                                              31

2.3.4    Efficient frontier theory                                                                                  32

2.3.5    The Keynesian theory of government expenditure/economic growth            33

2.3.6    Neo-classical theory/exogenous growth theory                                              36

2.3.7    Endogenous growth theory                                                                            38

2.4       Empirical Literature                                                                                        39

2.5       Summary of Review of Literature                                                                  61

2.6       Gap in Literature                                                                                             64

CHAPTER 3: METHODOLOGY                                                                             65

3.1       Research Design                                                                                             65

3.2       Area of Study                                                                                                 66

3.3       Sources of Data                                                                                              67

3.4       Model Specification                                                                                        67

3.5       Measurement of the Variables                                                                        73

3.6       Method for Data Analysis                                                                              75

3.6.1    Unit root test                                                                                                   71

3.6.2    Cointegration test                                                                                           76

3.6.3    Autoregressive distributed lag (ARDL)/error correction

modeling (ECM) technique                                                                            77

3.6.3.1 t-statistic                                                                                                         78

3.6.3.2 F-statistic                                                                                                        78

3.6.3.3 R-squared                                                                                                        79

3.6.3.4 Durbin-Watson statistic                                                                                  79

CHAPTER 4: DATA ANALYSIS AND DISCUSSION OF FINDINGS              80

4.1       Data Analysis                                                                                                  80

4.1.1    Nigeria                                                                                                            80

4.1.1.1 Lag order selection criteria                                                                             80

4.1.1.2 Unit root test                                                                                                   83

4.1.1.3 Cointegration test                                                                                           83

4.1.1.4 Vector error correction model (VECM) Results                                             87

4.1.2    Cameroun                                                                                                        97

4.1.2.1 Lag order selection criteria                                                                             97

4.1.2.2 Unit root test                                                                                                   100

4.1.2.3 Cointegration test                                                                                           101

4.1.2.4 Vector error correction model (VECM) results                                              104

4.1.3    Ghana                                                                                                              114

4.1.3.1 Lag order selection criteria                                                                             114

4.1.3.2 Unit root test                                                                                                   116

4.1.3.3 Cointegration test                                                                                           117

4.1.3.4 Vector error correction model (VECM) results                                              120

4.1.4    Gambia                                                                                                            130

4.1.4.1 Lag order selection criteria                                                                             130

4.1.4.2 Unit root test                                                                                                   132

4.1.4.3 Cointegration test                                                                                           133

4.1.4.4 Vector Error Correction Model (VECM) Results                                          136

4.1.5.1 Pooled-effect Regression Results                                                                   145

4.2       Test of Hypotheses                                                                                         152

4.3       Discussion of Findings                                                                                   153

4.3.1    Effect of government capital expenditure on net FDI inflows,

economic growth and development                                                                153

4.3.2    Effect of government recurrent expenditure on Net FDI Inflows,

Economic Growth and Development                                                             155

4.3.3    Effect of tax revenue on FDI inflows, economic growth and development  156

CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS                                                                                        158

5.1       Summary of Findings                                                                                     158

5.2       Conclusion                                                                                                      159

5.3       Recommendations                                                                                          160

REFERENCES                                                                                                          162

APPENDICES                                                                                                           170

 

 

 

 

 

 

 

 

 

 

 

 

LIST OF TABLES

2.1:      Data on General Government Final Consumption Expenditure

in Nigeria, Cameroun, Ghana and Gambia (1980-2017)                                20

2.2:      Data on Gross Domestic Product Growth Rate in Nigeria, Cameroun,

Ghana and Gambia (1980-2017)                                                                    24

2.3:      Data on FDI, Net Inflow (% of GDP) in Nigeria, Cameroun, Ghana

and Gambia                                                                                                     27

2.4:      Summary of Literature Review                                                                      61

1a:       Optimal Lag Selection Criteria (FDI Model)                                                 80

2a:       Optimal Lag Selection Criteria (GDP Model)                                                81

3a:       Optimal Lag Selection Criteria (GDPPC Model)                                           82

4a:       Augmented Dickey-Fuller (ADF) Unit Root Test Result                              83

5a:       Johansen Cointegration Test Result for FDI Model                                       84

6a:       Johansen Cointegration Test Result for GDP Model                                     85

7a:       Johansen Cointegration Test Result for GDPPC Model                                86

8a:       Vector Error Correction Modeling (VECM) Result for FDI Model              87

9a:       Vector Error Correction Model (VECM) Result for FDI Model                   89

10a:     Vector Error Correction Modeling (VECM) Result for GDP Model            90

11a:     Vector Error Correction Model (VECM) Result for GDP Model                 92

12a:     Vector Error Correction Modeling (VECM) Result for GDPPC Model       94

13a:     Vector Error Correction Model (VECM) Result for GDPPC Model            96

1b:       Optimal Lag Selection Criteria (FDI Model)                                                 97

2b:       Optimal Lag Selection Criteria (GDP Model)                                                98

3b:       Optimal Lag Selection Criteria (GDPPC Model)                                           99

4b:       Augmented Dickey-Fuller (ADF) Unit Root Test Result                              100

5b:       Johansen Cointegration Test Result for FDI Model                                       101

6b:       Johansen Cointegration Test Result for GDP Model                                     102

7b:       Johansen Cointegration Test Result for GDPPC Model                                103

8b:       Vector Error Correction Modeling (VECM) Result for FDI Model              104

9b:       Vector Error Correction Model (VECM) Result for FDI Model                   106

10b      Vector Error Correction Modeling (VECM) Result for GDP Model            107

11b:     Vector Error Correction Model (VECM) Result for GDP Model                 109

12b:     Vector Error Correction Modeling (VECM) Result for GDPPC Model       110

13b:     Vector Error Correction Model (VECM) Result for GDPPC Model            112

1c:       Optimal Lag Selection Criteria (FDI Model)                                                 114

2c:       Optimal Lag Selection Criteria (GDP Model)                                                114

3c:       Optimal Lag Selection Criteria (GDPPC Model)                                           115

4c:       Augmented Dickey-Fuller (ADF) Unit Root Test Result                              116

5c:       Johansen Cointegration Test Result for FDI Model                                       117

6c:       Johansen Cointegration Test Result for GDP Model                                     118

7c:       Johansen Cointegration Test Result for GDPPC Model                                119

8c:       Vector Error Correction Modeling (VECM) Result for FDI Model              120

9c:       Vector Error Correction Model (VECM) Result for FDI Model                   122

10c:     Vector Error Correction Modeling (VECM) Result for GDP Model            123

11c:     Vector Error Correction Model (VECM) Result for GDP Model                 125

12c:     Vector Error Correction Modeling (VECM) Result for GDPPC Model       127

13c:     Vector Error Correction Model (VECM) Result for GDPPC Model            129

1d:       Optimal Lag Selection Criteria (FDI Model)                                                 130

2d:       Optimal Lag Selection Criteria (GDP Model)                                                131

3d:       Optimal Lag Selection Criteria (GDPPC Model                                            131

4d:       Augmented Dickey-Fuller (ADF) Unit Root Test Result                              132

5d:       Johansen Cointegration Test Result for FDI Model                                       133

6d:       Johansen Cointegration Test Result for GDP Model                                     134

7d:       Johansen Cointegration Test Result for GDPPC Model                                135

8d:       Vector Error Correction Modeling (VECM) Result for FDI Model              136

9d:       Vector Error Correction Model (VECM) Result for FDI Model                   138

10d:     Vector Error Correction Modeling (VECM) Result for GDP Model            139

11d:     Vector Error Correction Model (VECM) Result for GDP Model                 141

12d:     Vector Error Correction Modeling (VECM) Result for GDPPC Model       142

13d:     Vector Error Correction Model (VECM) Result for GDPPC Model            144

14a:     Pooled-effect Ordinary Least Squares Result for FDI Model                       146

14b:     Pooled-effect Ordinary Least Squares Result for GDP Model                      148

14c:     Pooled-effect Ordinary Least Squares Result for GDPPC Model                 150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIST OF FIGURES

2.1:      General Government Final Consumption Expenditure                                  22

2.2:      Trends in Economic Growth in Nigeria, Cameroun, Ghana and Gambia      25

2.3:      Trends in Net FDI Inflow (% of GDP) in Nigeria, Cameroun,

Ghana and Gambia                                                                                         28