Foreign direct investment, economic growth and environmental quality in sub-saharan Africa: a dynamic model analysis

Abstract

The paper investigates the dynamic interactions among the inflow of foreign direct investment, economic growth and environmental quality of the countries in Sub-Saharan Africa (SSA). It seeks to examine the environmental implications of the inflow of foreign direct investment and economic growth of the countries in the sub-region. The dynamic interaction was examined through Panel Vector Autoregressive (PVAR) and Panel Vector Error Correction (PVEC) methodologies on a sample of thirty-three SSA countries. Panel unit root test and panel cointegration test were conducted to determine the degree of stationarity of the variables and long–run relationship among our variables of interest respectively. The results of the empirical analysis showed that dynamic interactions exist among foreign direct investment, economic growth and environmental quality, with the magnitude of influence on one another between 13.1% and 32.8%. The paper suggests that governments of Sub–Saharan African countries should strike a balance between investment friendly policies and environmental protection policies such that foreign direct investment that will be attracted into the region will be those that will improve the environmental quality of the countries in the region.

Keywords: Dynamic Interactions, Panel Vector Autoregressive, Panel Vector Error Correction, Cointegration, Impulse-Response, Variance Decomposition