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The Effect of Liberalizing Trade on Foreign Direct Investment Flows into Sub-Saharan Africa Countries

Wondafrash Debebe

Recently there has been an increase in FDI flows into SSA countries, with variations across countries. However, one of the potential determinants of FDI that is barriers to trade have affected the attraction of FDI in many of the SSA countries for long periods of time. Therefore, this paper tried to examine the effect of liberalizing trade which is measured by openness to trade on FDI inflows, using a long panel dataset for SSA countries during 1995 to 2016. The study accounted for errors in measurement issues and heterogeneity, and hence employed a generalized method of moment (GMM) regressions, using FDI inflows per capita as a dependent variable, and openness to trade, as key variable in the model. In existing literatures there had been diversifications about their relationships. Some studies verified positive and significant relationship and some found it insignificant. This study results indicated that liberalization of trade in SSA countries had a positive relationship to FDI inflows in general. Particularly, trade openness had a significant effect on the flow of FDIs into nonresource intensive SSA countries but in resource intensive SSA countries it had insignificant though the effect of natural resource to FDI inflows was both positive and significant. The empirical results in general ratified that liberalization of trade had contributed positively to FDI flows into SSA countries but found significant difference in the effect on the flows of FDI in resource intensive versus non-resource intensive sets of countries. Therefore, based up on the finding, SSA countries governments and policy makers should justify that countries have used general policies in improving the investment climate and specific policies that accelerate growth and contribute for development must be implemented.