The Role of FDI and Openness to Trade in Economic Growth : A study of Africa and Asia

Abstract: Economic growth from a globalisation point of view is seen as being impacted to a large extent by two phenomena – foreign direct investments (FDI) and trade. FDI brings many positive spillovers such as technological progress and increases in human capital. Trade can help improve the efficiency of production allocation in which the comparative advantage lies. According to David Nellor (2008) parts of sub-Saharan Africa today experience growth rates similar to those of the first five founding members of ASEAN in the beginning of the 1980’s: Singapore, Thailand, the Philippines, Malaysia and Indonesia. The purpose of this bachelor thesis is to analyse the role of FDI and trade openness in promoting economic growth in Africa and Asia. The contrast in how FDI and openness to trade affect growth rates in these regions in particular is something that has been left out from previous studies. It may give a hint of what factor(s) are important for Africa and Asia to focus on in order to stimulate economic growth. The effects of FDI and trade openness on economic growth are empirically tested using data on a sample of 82 countries in Africa and Asia over the years of 1999-2006. Regressions are conducted using the total sample as well as the regions separately to show on differences of the importance and effects of the explanatory variables in each of the two regions. The regression results most often indicate a positive relationship between FDI, trade and their combined effect on economic growth. Despite this the results are weaker than expected and in general insignificant. A possible explanation for the unexpected results may be due to additional forces driving economic growth such as macroeconomic stability, human capital, taxes and inflation all of which have been left out from the estimated model.