The Moderation Role of Corruption in the Relationship between Foreign Direct Investment and Economic Growth in Sub-Saharan African Countries

Gideon Nyamweya Mokaya, Winnie Iminza Nyamute, Kennedy Okiro and Laura Nelima Barasa

International Journal of Economics and Finance, 2024, vol. 16, issue 12, 73

Abstract: Foreign direct investment has recently become a major source of external financing among the developing countries. The Sub-Saharan Africa has become a major investment destination by the foreign investors. The literature shows that foreign direct investment contributes to economic growth through technological spillovers from developed countries to developing countries. In addition, FDI leads to the human capital development and employment creation. It also promotes international trade integration thus creating a competitive environment for local enterprises. Despite the increase in FDI in the Sub-Saharan Africa region, proportionate economic growth has not been realized. Corruption levels are also high in the region thus necessitating the need to investigate its role in the FDI economic growth nexus. Many studies have investigated the direct relationship between FDI and economic growth. There is also quite a number of studies that have studied the direct relationship between corruption and economic growth. However, a study on the moderating role of corruption on the relationship between FDI and economic growth is yet to be carried out. This study therefore investigates the moderating role of corruption on the relationship between FDI and economic growth in the Sub-Saharan Africa using data from 46 countries. The study uses fixed effects model. The study finds a negative and significant coefficient of the interaction term between FDI and corruption. This finding reveals that a corruption distorts the effectiveness of FDI in realizing economic growth. The study recommends the need for government to put in place strong institutions that deter corruption in the region.

Date: 2024
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