Inward foreign direct investment (FDI) and economic growth in Zambia: a bivariate causality link between FDI and GDP.

Abstract

This study was conceived to investigate the impact of foreign direct investment on economic growth in Zambia. Although it may seem natural to argue that foreign direct investment (FDI) can evince great advantages to host countries among which is GDP growth, technological transfer, knowledge transfer and sustainable benefits such as employment creation, empirical investigations are all the more necessary to ascertain any such relationships. The paper attempts to fill the knowledge gap in the area of foreign direct investment (FDI) research in Zambia. Since the early 1990’s, the relationship between FDI and economic growth has been extensively discussed in both economic literature and political spheres. This has led to Pro-FDI policies becoming a pillar of the development convention in Zambia and the developing and emerging nations at large. Data for the study was obtained from the World Bank’s world development indicators for the period 1980 to 2020, COMESA statistics, Zambia statistic agency, UNCTAD and Zambia Development Agency. Linear regression analysis was used to examine the relationships between FDI inflows and GDP growth. The paper employs linear regression analysis, Granger causality test, Johansen cointegration technique and vector autoregression (VAR). A unit root test was used to determine whether the data was stationary. Linear regression was used to model the relationship between the independent variable and the response of the dependent explanatory variable. The Johansen cointegration test was used to test for cointegration. Then, the Granger causality procedure was used to test the direction of causality between FDI and GDP. Empirical results derived in this study suggests a relationship between inward FDI and GDP. The practical implications of this is that the study sheds light on the relationship between FDI and GDP growth for Zambia, a nation that has been actively pursuing policies and strategies aimed at attracting FDI inflows to spur economic growth.