Foreign Direct Investment, Governance and Economic Growth Trilogy: New Evidence from ECOWAS Countries

Abstract

This study examined the impact of FDI and governance on growth. In addition, the role of the level of governance on the FDI-economic growth nexus was also explored. Data from, seven (7) ECOWAS countries from 1996-2010 were used for the enquiry. The Ordinary Least Square (OLS) and Threshold Auto Regressive (TAR) models were employed. The TAR model was applied to determine the optimal level of governance, which once attained, will induce the positive impact of FDI on growth. The study found that FDI and governance are positively related to growth in the linear regression (OLS). For the non-linear effect (TAR), the result showed that the positive effect(s) of FDI would begin to manifest once governance reaches a threshold level of -1.2. The study further conducted the Likelihood Ratio test and obtained a value of 8.326, which affirms the statistical significance of the result obtained at the 5 per cent level. Finally, we found that sound macroeconomic policies also played an important role in conditioning the direct benefits of FDI.