The linkages between FDI and domestic investment: Unravelling the developmental impact of foreign investment in sub-Saharan Africa
Development Policy Review
African Development Bank, Tunis, Tunisia; UN Economic Commission for Africa and IZA, P.O. Box 3005, Addis Ababa, Ethiopia
While the recent increase in foreign direct investment (FDI) to African countries is a welcome development, the impact of these resource inflows on economic development remains in doubt. This article argues that a key channel is its effects on domestic factor markets, especially domestic investment, and analyses the two-way linkages between FDI and domestic investment in sub-Saharan Africa. The results suggest, first, that FDI crowds in domestic investment and, secondly, that private investment is a driver of FDI, implying that African countries will gain much from improving the domestic climate. Moreover, there are alternatives to resource endowments as a means of attracting foreign investment to non-resource-rich countries. © 2008 Overseas Development Institute.
capital flow; economic development; economic impact; foreign direct investment; private sector; Africa; Sub-Saharan Africa