Foreign Direct Investment and Economic Growth Nexus: Empirical Insight from Guinea

Abstract

Although the predominant theoretical literature presumed foreign capital inflows to carry broad benefits to recipient nations, this assumption has been recently questioned in Guinea since the resulting GDP growth has weakly impacted social welfare. This empirical study offers a better insight of the extent to which foreign direct investment (FDI) influences economic growth in the Guinean context over the period 1990-2017. The per GDP FDI net inflows and GDP growth rate are respectively employed as FDI estimate and economic advancement indicator. The findings established in this study included: first, foreign direct investment in the long run positively affects economic advancement in Guinea at 1% significance level. This outcome suggests that 1% raise in FDI per GDP leads to 0.45 increase in GDP growth. Moreover, this finding is in line with the main literature related to foreign investment induced effects in Africa and other developing regions. Second, the short run coefficients suggest the same story exposed by the long run investigation. FDI per GDP [L1], [L2] positively and significantly influences economic growth in the Guinean context. Even though there is strong evidence that FDI positively affects growth in Guinea, government should consider the form of foreign investments to be promoted in the country. The study recommends that resource seeking type without transformation must be discouraged for the benefit of market or efficiency seeking investment. By doing so, Guinean economy will experience healthier and welfare enhancing growth.