Effects of foreign direct investment on industrial development in Sub-Saharan Africa: the role of exchange rate misalignment

Kirsi Zongo (), Mahamadou Diarra () and Idrissa M. Ouedraogo ()
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Kirsi Zongo: University Thomas SANKARA
Mahamadou Diarra: University Norbert Zongo
Idrissa M. Ouedraogo: University Aube Nouvelle

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2024, vol. 51, issue 4, No 6, 925-955

Abstract: Abstract The aim of this article is to analyze the role of exchange rate misalignment in explaining the effects of foreign direct investment (FDI) on industrial development in Sub-Saharan Africa. To this end, the ARDL model was used to analyze the nature of exchange rate misalignment, before mobilizing spatial econometrics to examine its role in explaining the effects of FDI on industrial development. The estimates show that: (1) the exchange rate of SSA countries registers positive deviations (overvaluation) and negative deviations (undervaluation) of the exchange rate, and that these effects are more pronounced in countries with fixed exchange rate regimes; (2) FDI has positive effects on industrial development, but undervaluation amplifies these effects, while overvaluation attenuates them. The article recommends adopting exchange rate undervaluations and improving the business climate to encourage massive FDI inflows and job creation in the manufacturing sector.

Keywords: Exchange rate; Undervaluation; Industrial performance; Spatial econometrics; Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: C21 E43 F21 O14 O55 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40812-024-00314-3

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