Impact of FDI on Welfare and Regional Integration in Africa

Issouf Soumaré

The current financial crisis has reanimated the debate on the importance of foreign direct investments (FDI) for economic growth and poverty reduction in developing countries. Many financial economists agree that the crisis may have stronger negative effects on economic growth in Africa because of the potential reduction in foreign capital flows. The main literature studies the causal link and relationship between FDI and economic growth with the basic assumption that economic growth is a good proxy for welfare, which is not always true. Moreover, fewer of these papers have been devoted to Africa and its regional disparities on attracting foreign investments. This paper intends to re-examine the relationship between FDI flows and welfare in Africa across regions. We use as a key welfare variable the UNDP human development index (HDI). Our paper confirms the positive and significant relationship between FDI net inflows and welfare in Africa. Nevertheless, this relationship is significantly different between African regions and between Africa and other parts of the World.

For instance, while the relationship remains positive and significant for economic communities in Central and East Africa, it is non significant in North and South Africa and ambiguous in West Africa.