Foreign direct investments, exports and economic growth in COMESA countries: a heterogeneous panel causality approach

Abstract

This study examines the interrelationship between Foreign Direct Investment, exports and economic growth in COMESA Countries so as to assess the validity of “FDI-led exports”, “Export-led growth” and “FDI-led growth” hypotheses in that region. The study uses annual data for a panel of 16 COMESA Countries: Burundi, Comoros, DRC, Egypt, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe for the period 1983-2007. The following variables are involved; the Ratio of Inward FDI (percentage of GDP), the Ratio of exports of goods and services (percentage of GDP) and the Growth rate of Real GDP. We test for Granger causality in heterogeneous panels by testing first for Homogeneous Non-Causality and Homogeneous Causality hypotheses as proposed by Hurlin and Venet (2001, 2003) and Hurlin (2004, 2007, 2008). We further use the Pooled Mean Group (PMG) estimation for Heterogeneous Causality tests, method suitable for non-stationary panels, proposed by Pesaran et al. (1999). The findings suggest strong support for the “FDI-led exports” hypothesis, the “Export-led growth” hypothesis as well as the “FDI-led growth” hypothesis. Hence, in general, policies promoting exports and attracting FDI in COMESA Countries are to be encouraged so as to promote and sustain economic growth in the region