A Case Of Sub Saharan Africa Economics Essay

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Many literatures suggested that FDI has an impact on trade. Harmonizing to Mundell ( 1957 ) FDI and trade are substitutes nevertheless this proposition was challenged by Agmon ( 1957 ) and later a figure of surveies have detected that trade and FDI complement each other. Ethier ( 1994, 1996 ) and Markusen ( 1995, 1998 ) has besides evaluated this literature. But, on the other manus, recently, farther probe about the relationship between FDI and trade has been undertaken by some surveies by taking a incorporate attack, which claimed coincident finding of the two flows in developed states ( Markusen and Maskus, 2001 ) .

There are three classs in which these surveies of trade and FDI can be divided: First, are those who argued that the determiners of FDI and trade are the same and therefore what determines FDI flows besides determines trade ( Ekholm, 2002 ) . Second, are those who estimated econometric theoretical accounts in which FDI, exports and imports are determined at the same time and argued that as all these three are endogenous variables, it is really critical to take their interactions into history ( Hejazi and Safarian, 2003 ) . Finally, are those who focused at the impact of RTA on FDI flows ( Binh and Haughton, 2002 ; Worth, 2002 ) . Banga ( 2004 ) illustrates that RTA like ASEAN and APEC can act upon FDI inflows into the part as the hazards related to investings lessenings with greater regional integrating. Although the above surveies have noted to some extents the effects of trade on FDI influxs, they have non entirely captured these effects by through empirical observation finding the effects of different sorts of trade on FDI influxs.

Trade Liberalization

Increasing returns to scale from big market ; and cut downing rent seeking behaviour ; higher degree of end product through specialisation harmonizing to comparative advantage ( Wacziarg, 1998 ) ; alteration in the economic construction ; import of fabricating goods T h a T are important for development ; accelerated cognition and engineering transportation ( Krueger, 1998 ; and Edwards, 1998 ) are by and large the theoretical statement for a inactive and dynamic additions from trade which is related to better resource allotment through competition.

Harmonizing to the the empirical literature there is assorted grounds as to the impact of trade liberalisation on economic growing. By utilizing the effectual policy constituent of trade portion as a step of openness, with a panel information method, a strong and positive impact of openness on economic growing was found by Wacziarg ( 1998 ) . Using different steps of openness, based on cross subdivision of 93 states, a strong positive nexus between openness and productiveness growing was found by Edwards ( 1997 ) . Through a dynamic panel informations method, a modest impact of trade liberalisation on growing was shown by Greenaway ( 2001 ) . A ‘compliance index ‘ as an explanatory variable was employed by Noorbakhsh and Paloni ( 2001 ) , to mensurate to which extent states comply with the conditionality reforms and fundamentally found that states which adopted macroeconomic policy reforms had in fact improved their economic public presentation while those that had made limited accommodation attempts perform ill. Shaeffeddin ( 2006 ) , nevertheless, argued that an absolute step of trade liberalisation reform would take to a deaˆ?industrialization of developing states which supports openness argue would be attained through trade liberalisation. He supported his statement by utilizing historical grounds that authorities intercession and a long period of discriminatory baby industry protection played a cardinal function to accomplish industrialisation in most states.


At both conceptual and empirical degrees, the survey of a house ‘s enlargement into foreign markets has received increasing attending. Andersen ( 1997 ) argued that the effort to analyze the assorted models and theories including Hymer ‘s theories ( 1976 ) , merchandise life rhythm theory ( Vernon 1966 ) , incremental phase manner ( Johnason & A ; Vahlne 1977, 1990 ) , the web theoretical account ( Johansson

& A ; Vahlne 1990 ) , resource-based theoretical account ( Barney 1991 ) , dealing cost theory ( Williamson ‘s 1985 ) and Dunning ‘s eclectic theory ( 1980 ) sing the foreign entry manner determination would be instead disputing. While the eclectic theory was regarded as a ( general ) theory by tormenting ( 1988 ) , ) it was suggested as a paradigm by Cantwell ( 1989 ) and described as a taxonomy of assorted determiners of foreign direct investing by Itaki ( 1991 ) . But, there is no general understanding on what should be labelled as theory, conceptual model or paradigm in the field of international business.Hence, here our chief statement would be on the eclectic paradigm as it contains elements which best explicating international production apart from dealing cost theory.

The eclectic paradigm

One of the chief models use to analyze and explicate the FDI determinations of transnational houses over the past two decennaries is the Eclectic paradigm, besides known as the OLI theory, ( Zhao & A ; Decker 2004 ) . Refering the ownership and location of international production, in response to several partial theories, taking into history merely one or a few market imperfectnesss severally, the eclectic paradigm was developed by Tormenting ( 1977 ) . It has been, of all time since, refined and develop in Dunning ( 1981 ; 1988 ; 1993a ; 1995, 2001, 2004 ) , every bit good as in Gray ( 1996 ) . The intent of the OLI paradigm was to “ offer a holistic model by which it was possible to place and measure the important factors act uponing both the initial act of foreign production by endeavors and the growing of such production ” ( Tormenting 1988 ) . It is ‘the precise constellation of the ownership, location and internalisation ( OLI ) advantages ( and disadvantages ) facing houses, and their strategic reaction to them, that will find, at any given minute of clip, the nature, degree, and construction of MNE activity ‘ ( Tormenting 1993 ) .

There are three sets of advantages harmonizing to Dunning ‘s eclectic model of international production which houses consider while doing their FDI picks. These are viz. : ownership specific advantages ( related to the control issue, the costs and benefits ( hazard ) of inter-firm relationships and minutess ) , Location-specific advantages ( these are resources in a peculiar location ) and Internalization advantages ( chiefly purpose at cut downing dealing and coordination costs ) ( Tormenting 1993, 1998, 2004 ; Cantwell & A ; Narula 2001 ) . These benefits influence a house ‘s FDI behaviour as they have an impact on the direction perceptual experience of plus power ( ownership-specific advantage ) , market attraction ( location particular advantages ) , and on the cost of integrating ( internalisation advantages ) ( Agarwal & A ; Ramaswami 1992 ) .

Motivations for International Production

Harmonizing to, Dunning ( 1993 ) , the motivations for international production undertaken by a transnational corporation are: 1 ) resource seeking, 2 ) market seeking 3 ) efficiency seeking and 4 ) strategic plus seeking ( Dunning, 1993 ) .

Market-seeking FDI undertaking

In order to prolong or protect bing markets or to work or advance new markets market-seeking FDIs are undertaken ( Tormenting 1993 ) . The purpose of market-seeking houses is to increase their gross revenues at least in a medium-term position ( MacCarthy & A ; Atthirawong 2003 ; Cheng & A ; Kwan 2000 ) . Market searchers are normally houses who invest in a peculiar state or part so as to function markets over at that place. Therefore market-seeking houses usually choose those locations which they consider the best to achieve existent and future market growing objective ( Dunning, 1998 ) . This type of FDI may besides be use as a defensive scheme: it is argued that out of fright of losing a market, concerns are more likely to be pushed towards this sort of investing instead than the promise of detecting a new one.

There are besides other grounds for which market-seeking houses may set about foreign investing. While look intoing the motivations underlying UK outward FDI, Shepherd, Silberston and Strange ( 1985 ) saw that the demand to remain near to clients was the lone most critical ground underlying the determination to set about FDI.

The 2nd ground is that a house may necessitate to bring forth its goods and services harmonizing to the local gustatory sensations and specific market demands and that can merely be achieved through a market presence in the signifier of FDI. This is because if foreign manufacturers does non familiarise themselves with local linguistic communication, concern imposts, legal demands and selling manufacturers, they might be find at a disadvantage vis a vis local houses in selling consumer goods such as machines, two-channel equipment and a wide scope of nutrient and drink merchandises, in add-on to those providing intermediate merchandises like building machinery, petrochemicals and forestry merchandises, fiscal and professional services ( Tormenting 1993 ) .

The 3rd ground is that by functioning a local market from an next installation the production and dealing costs would be lower compared to providing a market from a distance. goods that can be produced expeditiously in little measures and whose conveyance cost is high are largely located near their clients compared to production of those goods whose conveyance cost is inexpensive and hence benefits from economic systems of graduated table ( Tormenting 1993 ; 58 ) .

The 4th one is that as portion of its planetary scheme, a house may see it necessary, to hold a physical presence in the taking markets served by its rivals.

( Tormenting 1993:59 ) .

Taking motive into history, SAMUEL ATO DADZIE ( 2012 ) pointed out that big market size influences the motive of foreign houses to set about market-seeking FDIs whereas big cultural distance and broad international experience lessening the motive of foreign house to set about market-seeking FDI.

Resource seeking FDI undertaking

Resource-seeking FDIs are largely undertaken to work the comparative advantages of single states, such as low costs of labour parts and constituents favourable entree to raw stuffs ( Brouthers, Werner & A ; Wilkinson 1996 ; Tormenting 1993a ; Cantwell 1991 ) . The chief purpose of resource-seeking houses is to entree specific resources in the host state at lower cost degrees compare to what they achieve at nowadays in their place states ( e.g. Galan, Gonzalez-Benito, and Zuniga- Vincente 2007 ) . There are two things on which resource seeking MNEs focal point on: assets for the economic growing of the place state ( Jenkins & A ; Edwards 2006 ; Ndikumana & A ; Verick 2008 ) , and supply-oriented variables ( Castro 2007 ) .

In several empirical surveies ( Burgenmeier 1991 ; Bachtler & A ; Clement 1990 ; Kayser & A ; Schwarting 1989 ; Hedlund & A ; Kverneland 1984 ) , houses have been motivated by resource-seeking aim. Harmonizing to Randoy ( 1994 ) , while set abouting resource-seeking FDIs, the investment houses are motivated by the benefits derived from capitalising upon the location advantages of peculiar locations. Therefore, in order to work their O advantages in new constellation of location advantages, these houses undertake FDI undertakings. Furthermore so as to increase possible rents to be realized from their O advantages, foreign houses normally undertake resource-seeking FDI undertakings.

Efficiency- seeking FDI undertaking

Efficiency-seeking undertakings are carried out to cut down the construction of established production units in such a manner that a house can profit from the common administration of interconnected activities in different locations ( Tormenting 1993 ) . Behrman ( 1991 ) argues ( stated ) out that houses who undertake efficiency-seeking FDIs are ‘looking for the economic beginnings of production to function a multicountry standardised market ‘ . The possible advantages of efficiency-seeking FDIs are peculiarly those of economic systems of graduated table and range, which are derived from procedure specialisation and merchandise and geographical concentration ( Balcet 1995 ; Tormenting 1993 ; Kim & A ; Whang 1994 ) and from being established in the multiple merchandise markets ( Tormenting 1993 ) .

Harmonizing to SAMUEL ATO DADZIE ( 2012 ) the efficiency-seeking and resource-seeking motivations of FDIs lead to a penchant for a joint venture manner of ownership.

Strategic asset-seeking FDI undertaking

MNEs who engage in FDI, by geting the assets of foreign corporations, to advance their long-run strategic aims, particularly that of prolonging or progressing their international fight are known as the Strategic asset-seeking MNEs. The investing houses concerned comprise of both established MNEs following an integrated planetary or regional scheme and first clip foreign direct investors seeking to purchase competitory strength in a new market ( Tormenting 1993 ) . Previous surveies ( e.g. Teece 1992 ; Tormenting 1993, 1995 ; Chang 1995 ; Almeida 1996 ; Shan & A ; Song 1997 ; Frost 2001 ) have acknowledged that houses invest in foreign states non merely to work but besides to develop their firm-specific advantages or get necessary strategic assets in the host state. These surveies highlighted that a house ‘s firm-specific advantages would happen non merely by geting proprietary assets but besides of the ability to get, or the efficient direction of the complementary assets owned by other houses in a host state ( Tormenting 1995, 1998, 2000 ) . Strategic asset-seeking FDI is perchance the fastest growth of the four motivations for abroad investing ( Dunning 1994 ) .

Determinants of FDI in Africa

Despite the African states that have been able to pull most FDI have been those with natural and mineral resources and big domestic markets, but, these are non the exclusive determiners of FDI to the part. Morisset ( 2000 ) , Asiedu ( 2006 ) and many other surveies that center on Africa propose that the list of factors act uponing FDI is rather long, though non all determiners are every bit critical to each investor in each location all the clip ( Ajayi, 2006 ) . For Africa, so, the specific determiners of FDI include market size and growing, handiness of natural resources, human capital costs and accomplishments and handiness of good substructure. Others are openness of the economic system, political and economic stableness, institutional quality, investing ordinance and international pacts and warrants. Investing publicity, return on investing and other factors such as costaˆ?related factors, concentration of other investors, investing inducements, denationalization and influxs of bilateral ODA are besides FDI drivers taken into history.

Krugell ( 2005 ) stated that one of the most of import determiners of FDI is market size and growing. The most widespread statement for how relevant market size and growing are in pulling FDI is that a immense domestic market size creates scale economic systems, as a lifting market improves the chances of the market potency ( e.g. Tsai, 1994 ) . Consequently, an economic system with a immense market size should pull more FDI and states holding sustained and high growing rates should obtain more FDI flows than volatile economic systems.

Market growing and market size are among the most dominant longaˆ?run determiners of FDI in SSA ( Bendeaˆ?Nabende, 2002 ) . Harmonizing to the groundss found by Bhattacharya et Al. ( 1996 ) , Elbadawi and Mwega ( 1997 ) , Morisset ( 2000 ) and Onyeiwu and Shrestha ( 2004 ) economic growing are really of import in pulling FDI flows to Africa. Elbadawi and Mwega ( 1997 ) besides pointed out that states in the SADC part attract more FDI compared to other states in Africa. Some investors, peculiarly those from East Asiatic states, have invested in Botswana so as to be able to bring forth for the South African market ( Bhinda et al. , 1999 ) . MNEs who desired to function the immense market in South Africa situated their subordinates in Lesotho and Swaziland ( Basu and and Srinivasan, 2002 ) . It was besides concluded by Asiedu ( 2003 ) and Lemi and Asefa ( 2003 ) , along with other factors, big markets promote FDI to the part. The same goes for the South African state ( Fedderke and Romm, 2006 ) .

Comparably, for US fabricating FDI to Africa, Agodo ( 1978 ) showed that GDP growing was undistinguished, while GDP and GDP per capita proved to be a positive influence, whilst GDP growing was undistinguished. Asiedu ( 2002a ) and Yasin ( 2005 ) found that the theory that higher growing rates foster FDI is besides undistinguished. The writers added that for market-seeking FDI, the attraction of the host state ‘s market is peculiarly critical, but this is non likely to be the instance as the largely hapless and little states were included in their analysis.

Historically, due to the demand of industrialising states of Europe and North America to procure an economic and dependable beginning of minerals and primary merchandises, the handiness of natural resources has been the critical factor in pulling FDI ( Dunning, 1993 ) . Asiedu ( 2003 ) ; Onyeiwu and Shrestha ( 2004 ) , have found that the handiness of natural resources are positively related to FDI flows to Africa. Kolstad and Tondel ( 2002 ) argue that states such as Angola which are rich in oil and other natural resources are able to pull heavy FDI influxs. Africa is peculiarly outstanding in the field of excavation of highaˆ?value minerals and crude oil as a host to FDI and so this is where great potency for future FDI exists ( Basu and Srinivasan, 2002 ) .

Krugell ( 2005 ) besides highlighted that the other importants determiners of FDI are inexpensive labor and the quality of the labour force. Lemi and Asefa ( 2003 ) and Yasin ( 2005 ) discover that the handiness of an abundant and inexpensive labor force has the most likely positive effects on FDI to Africa. Despite the fact that it may non be the lone exclusive factor, but to some extent the success of Mauritius in pulling FDI is explained by the comparatively inexpensive, adaptable and good trained work force ( Odenthal, 2001 ) . In the same vena, Fedderke and Romm ( 2006 ) show that pay costs had a negative impact South Africa FDI. Furthermore, Lemi and Asefa ( 2003 ) and Asiedu ( 2006 ) besides find grounds an educated labor force played a really of import function in pulling FDI flows to African states. However, there is deficiency of center or senior degree entrepreneurial experience which has raised the bing accomplishments spread in Africa, and many foreign companies have opted to employment of exile directors ( Bhinda et al. , 1999 ) .

On the other manus, Bendeaˆ?Nabende ( 2002 ) states that, because some states in the SSA sample did non hold sufficient timeaˆ?series informations for the instruction and existent pay rates variables, no definite decisions can be drawn about average old ages of the latter. Morisset ( 2000 ) besides found that refering location determination of MNEs the handiness of comparatively skilled labors do non look to be a major factor and this is a possible cause for progressing informations defects in most African states.

The handiness of quality substructure is a critical determiner of FDI ( Krugell, 2005 ) . Asiedu ( 2002b, 2003, 2006 ) present grounds that good substructure promote FDI to Africa. However, Pigato ( 2001 ) argue that the figure of telephone mainlines and the per centums of roads that are paved are the factors in which Africa lags behind. The consequences fixed effects panel appraisal used in Asiedu ( 2002b ) besides designate that in the 1990s the fringy benefit from increased substructure was less than in the 1980s and therefore in order to have investings at degrees comparable to the 1980s African states need to supply better substructure. In add-on, Asiedu ( 2004 ) shows that, from 1980aˆ?89 to 1990aˆ?99, the rate for all developing states was higher than the rate of addition in the handiness, dependability and development of substructure in the SSA part. In contrast, Morisset, ( 2000 ) , Asiedu ( 2002a ) , Lemi and Asefa ( 2003 ) , Onyeiwu and Shrestha ( 2004 ) did non happen any grounds that substructure as measured by the figure of telephones per 1,000 population has any consequence on FDI influxs to Africa. Asiedu ( 2002a ) suggests that as FDI to Africa tends to be a natural resource based, the handiness of telephones is non relevant. Onyeiwu and Shrestha ( 2004 ) , have reportedly stress out that, late Angola and Nigeria are presumed to be the highest donee of FDI in Africa but however the substructure of both states is really hapless.

Apart from physical substructure, in order to pull FDI, handiness and efficiency of fiscal substructure is important. Harmonizing to a study of several African states by Bhinda et Al. ( 1999 ) factors that were on the top of the list in detering investors in Tanzania, Uganda and Zambia were the jobs related to mobilising local banking, renting or equity finance. On the other manus, Asiedu ( 2002a ) used fiscal deepening ( traditionally measured by the ratio of M2 to GDP ) as a control variable to prove the hardiness of her basic theoretical account, but the estimated coefficient bend to be undistinguished.

Openness of the economic system is a really of import determiner of FDI. Harmonizing to Blomstrom and Kokko ( 1997 ) , the more unfastened the economic system, the more it would pull the FDI from MNEs seen as different associates specialising in relation to the location advantages of the host state. In the empirical literature on the determiners of FDI to Africa ( Bhattacharya et al. , 1997 ; Morisset, 2000 ; Asiedu, 2002a, 2002b ; Bendeaˆ?Nabende, 2002 ; Lemi and Asefa, 2003 ; Onyeiwu and Shrestha, 2004 ; Yasin, 2005 ; Dupasquier and Osakwe, 2006 ; Fedderke and Romm, 2006 ) , the significance of the latter is good acknowledged.

Assorted political, economic and administrative restraints are the ground behind the deficiency of FDI in Africa states as they make direction of concern hard. There are many signifiers of Instability such as the overthrow of authoritiess, ( Gyimah-Brampong & A ; Traynor 1999 ) or other signifiers of political, societal and economic disturbance ( Owusu & A ; Habiyakare 2011 ) . During their empirical analysis of societal and political development of foreign investing in Africa, Kolstad and Tondel ( 2002 ) showed that less hazardous states attract more FDI per capita. Asiedu ( 2003, 2006 ) besides found that macroeconomic every bit good as political instability prevents investing flows in Africa. Furthermore, Rogoff and Reinhart ( 2003 ) achieve a statistically important negative correlativity between FDI and indexs such as struggles, rising prices and chance that the parallel market premia is above 50 per centum of political and economic instability in Africa. Furthermore, sweetening in the concern clime of Mali and Mozambique during the 1990s besides discloses that macroeconomic and political stableness one of the grounds for their recent success ( Morisset, 2000 ) . In contrast, Cyrysostome et Al. ( 2011 ) argued that some African states have really restraining ordinances sing gaining remittal of foreign companies due to which MNEs are discouraged in carry oning concern in the part. Barriers to information flow and deficiency of transparence are the other economic restraints that deter FDI influxs to Africa as they cut down FDI attraction ( Montial, 2006 ) . Investors believe that it is unfavourable for them to turn up in the African continent as they perceive it as a place for wars, civil agitation, poorness, disease and a by and large unfriendly investing finish and that ‘s why they divert their investings to other parts ( UNCTAD, 1999 ) . In other words, by virtuousness of the peril of the continent, African states receive less FDI than states in other parts.

The part to the betterment of the investing clime has been liberalized by FDI ordinances ( UNCTAD, 1998 ) . Bendeaˆ?Nabende ( 2002 ) found that FDI liberalisation is in the thick of the most dominant longaˆ?run determiners of FDI in SSA. The result from Asiedu ( 2003 ) besides designate that a good investing construction promotes FDI to Africa, i.e. investing limitations daunt investing flows to Africa ( Asiedu, 2003 ) .

In SSA Bendeaˆ?Nabende ( 2002 ) found that FDI liberalisation is among the most prima longaˆ?run determiners of FDI. The consequences from Asiedu ( 2003 ) besides indicate that a good investing model promotes FDI to Africa, i.e. investing limitations deter investing flows to Africa ( Asiedu, 2003 ) . Harmonizing to Basu and Srinivasan ( 2002 ) , inordinate market ordinances, i.e. domestic investing policies on net income repatriation and on entry into some sectors of the economic system were non favourable to the attractive force of FDI in Africa. Ghana, for illustration, has enlarged the range for foreign investing by cut downing the sectors antecedently closed to foreign investing ( Basu and Srinivasan, 2002 ) . In general, from the 1980s to the 1990s, the gait of liberalisation for SSA states as measured by three classs of indexes ( capital controls ; limitations on trade and investing ; FDI policy ) , was slow compared with other developing states ( Asiedu, 2004 ) .

Despite the liberalisation of FDI policies, many disagree that national FDI policies may non be enforceable and do non chew over on what foreign investors seek in vouching security and benefits ( Lemy and Asefa, 2003 ) . Therefore, states are signers to bilateral and many-sided investing and trade pacts to exemplify their committedness and to do certain the protection of investing and remain off from doubleaˆ?taxation, which will in conclusion do them more attention-getting for foreign investors ( UNCTAD, 1998 ) .

Sandrina Berthault Moreira ( 2010 ) made two of import elucidations about the above. First, the widespread perceptual experience among many perceivers is that FDI in African states is mostly motivated by their natural resources or aimed at the local market but these are non the lone determiners of FDI to the part. Even though the African states that have been able to be a magnet for most FDI have been those with natural and mineral resources every bit good as ( comparative ) big domestic markets, many other factors manipulate investing determinations in Africa. Second, several of the factors discussed above are definitely hindrances or obstructions of FDI to Africa and therefore grounds why Africa, in wide, has been unsuccessful in pulling FDI. However she highlighted that consciousness of these restraints enables authorities bureaus and the similar to device solid schemes to turn around Africa ‘s hapless FDI record.