FDI and Welfare Dynamics in Africa

• Published date: 01 May 2018
• Date: 01 May 2018
• Author: Charles Adjasi,Teresia Kaulihowa
• DOI: http://doi.org/10.1002/tie.21908

313

Published online in Wiley Online Library (wileyonlinelibrary.com)

© 2017 Wiley Periodicals, Inc. • DOI: 10.1002/tie.21908

Correspondence to: Dr. Teresia Kaulihowa, University of Namibia, Mandume Ndemufayo Avenue, Pioneers Park, P/Bag 13301, Windhoek, Namibia,

+264 (0)61 2063984 (phone), teeza.kaulihowa@gmail.com or tkaulihowa@unam.na

FDI and Welfare

Dynamics in Africa

By

Teresia Kaulihowa

Charles Adjasi

This article examines the welfare impact of foreign direct investment ( FDI ) in a panel of 20 African

countries over the period 2000–2013. We explore the multifactor and nonmonetary measures of wel-

fare and the nonlinear effect of FDI on welfare. We used the Driscoll and Kraay standard errors and

augmented mean group ( AMG ) estimator by Eberhardt and Teal ( 2010 ) to account for cross-sectional

dependency, endogeneity, and heterogeneity within panel units. The results indicate that although

FDI is welfare enhancing, the nonlinear terms report mixed  ndings. When a multifactor indicator is

employed, the increase in the nonlinear term is lower than the linear part. However, there is strong

evidence that FDI is ultimately welfare enhancing when a nonmonetary indicator is employed. From an

international business perspective, the  ndings have unlocked the welfare effects of international busi-

ness on African host economies. International businesses through FDI can enhance welfare in Africa

countries. However, the optimal efficacy of FDI -welfare impact differs across the various dimensions of

welfare. © 2017 Wiley Periodicals, Inc.

RESEARCH ARTICLE

Introduction

T he Millennium Development Goals Report ( 2015 )

divulges that sub-Saharan Africa managed to

reduce poverty from 56.5% in 1990 to 48.4%

in 2010. Although poverty has declined, the slow pace

of poverty reduction has raised concerns about real risk

reversal from current shocks and volatile global markets.

According to the African Development Bank ( 2014 ),

Africa has recorded a positive growth that is on average

5% above the global average of 3% since the year 2001.

However, reducing poverty by half remains a challenge.

Extractive industries (minerals, oil, and gas) that are

predominantly characterized by foreign direct investment

(FDI) have been the main drivers of Africa ’ s growth. It

should be noted that although international business has

been influential in promoting Africa ’ s positive economic

growth, its linkage with social welfare indicators is not well

established in Africa. Understanding how international

business activities translate into social welfare functions can

provide useful insight on its developmental impact and also

to identify opportunities of mutual benefits. In this context,

analyzing the impact of international business activities on

social welfare functions becomes crucial for Africa.

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RESEARCH ARTICLE

Thunderbird International Business Review Vol. 60, No. 3 May/June 2018 DOI: 10.1002/tie

This article tests the welfare impact of FDI in Africa.

FDI is employed by many economies as a strategy toward

attaining some of the Millennium Development Goals

(MDGs; International Monetary Fund [IMF], 1999 ; Over-

seas Development Institute, 2004 ; United Nations Con-

ference on Trade and Development [UNCTAD], 2005 ;

World Bank, 1997 ). Nonetheless, the extent to which FDI

enhances welfare, and subsequently reduces poverty, has

not been studied extensively, especially in Africa.

It is imperative to note that poverty is a multidi-

mensional phenomenon. However, the framework in

current literature is dominated by one-dimensional or

monetary measures (Agarwal & Atri, 2015 ; Alfaro, 2003 ;

Almfraji, Almsafir, & Yao, 2014 ; Blomstrom, Lipsey, &

Zejan, 1992 ; Borensztein, de Gregoria, & Lee, 1998 ;

De Mello, 1999 ; Shamim, Azeem, & Naqvi, 2014 ; Ucal,

2014 ; Whalley & Weisbrod, 2012 ). A one-dimensional

measure of economic development does not reflect the

equity attributes of the economy and may neglect the

key aspects of societal welfare. Society welfare is embed-

ded in a broader goal of economic development and is

complex and multidimensional in nature. As noted by Te

Velde and Morrissey ( 2004 , p. 350), “It would be wrong

to conclude a priori that FDI contributes automatically

to poverty reduction because FDI raises average growth.”

Nonincome indicators may play a major role in detecting

omitted attributes of welfare in monetary poverty mea-

sures (Ravallion, 1996 ).

This study is novel in a number of ways: first, both the

linear and nonlinear effects of FDI were captured; second,

more robust methodological approaches that controls for

cross-sectional dependency, endogeneity, and heteroge-

neity were used; and third, a uniquely African countries’

sample is concentrated on. In addition, the issue of

multifactor measures, as well as the capturing of mon-

etary and nonmonetary welfare indicators are addressed.

It shows that failure to capture the multidimensional

welfare effects of FDI masks the dynamic impact of FDI

on welfare. The literature is further extended by going

beyond the unitary monetary welfare effects of FDI to

test FDI effects on human development and child health.

This is important, since most welfare measures are one-

dimensional monetary indicators that fail to account for

the complex and diverse nature of welfare.

It is important to put in perspective that FDI flows to

Africa have risen substantially from the mid-1980s. For

instance, FDI rose from US$2.4 million in 1985 to US$36

billion, US$53 billion, and US$246.4 billion in 2006,

2007, and 2012, respectively (UNCTAD, 2014 ). However,

it is unclear whether the FDI has enhanced economic

development, reduced poverty, and induced welfare gains

in Africa. In this article, therefore, the first step is taken

to examine the link between FDI and welfare in Africa.

Theoretical literature on FDI and poverty is not

without ambiguities. The proponents of FDI allude that

FDI has the potential to alleviate poverty through employ-

ment creations, human capital development, an increase

in income, and inequality reduction (Dunning, 1977 ;

Hansen & Rand, 2006 ; Mankiw, Romer, & Weil, 1992 ).

Contrary to these propositions, Hymer (1968 ), Moran

( 1999 ), and Stiglitz ( 2002 ) theorize that FDI is prone to

market imperfections and unequal bargaining power that

may elevate inequality and impede welfare enhancement

strategies. It appears that whether FDI leads to welfare

enhancement or not depends on the nature and extent

of the spillover effect, and the veracity of this can be

ascertained only with further empirical work.

Other studies (Elmawazini, 2008 ; Elmawazini, Atal-

lah, Nwankwo, & Dissou, 2013 ; Xu, 2000 ) focus on techno-

logical progress/diffusion, quality of institution (Cleeve,

2012 ) and corporate social responsibility (Nyuur, Ofori,

& Debrah, 2015 ). However, a higher technological prog-

ress/diffusion does not necessarily translate into welfare

gains. Similarly, links from institutional quality may not

adequately capture the multidimensional phenomenon

of poverty. The concept of corporate social responsibility

(CSR) is well aligned to social welfare indicators; however,

it has also been criticized as an insufficient measure par-

ticularly to cross-country studies, because ranking of pri-

orities may differ from country to country (Visser, 2005 ).

Therefore, in this article, the aim is to examine the

impact of FDI on poverty in Africa in a multidimensional

approach that employs nonmonetary measures of welfare

indicators. The article contributes uniquely to the litera-

ture as it uses robust and rigorous econometric methods

to capture the nonlinearity of the FDI poverty link within

a multidimensional poverty framework.

In the remainder of this article, the literature review,

stylized facts of FDI and poverty in Africa, methodology

and interpretation of regression results, and conclusion

and policy implications of the research are elaborated

upon.

Literature Review

Theoretical predictions on the impact of FDI on welfare

appear to be complex and contradictory at times. The

proponents of FDI (Dunning, 1977 ; Findlay, 1978 ; Han-

sen & Rand, 2006 ; Mankiw et al., 1992 ; World Bank, 1993 )

argue that there is a direct and an indirect link between

FDI and welfare. FDI could affect welfare directly through

labor markets in terms of employment creation and