Investigating the Impact of Foreign Investment on Economic Growth in Selected West African Countries

Abstract

This study investigates the impact of foreign direct investment (FDI) on economic growth in selected West African countries, with particular emphasis on the roles of trade openness and inflation. Despite the growing importance of FDI as a source of external capital for developing economies, evidence regarding its growth-enhancing effects remains mixed, particularly within the West African region. To address this issue, the study employs GDP per capita as a proxy for economic growth, while FDI inflows as a percentage of GDP serve as the principal explanatory variable. Trade openness and inflation are incorporated as control variables to account for external sector performance and macroeconomic stability. Annual data were analysed using the Autoregressive Distributed Lag (ARDL) estimation technique, which enables the examination of both short-run and long-run relationships among the variables. The empirical findings reveal the existence of a long-run equilibrium relationship among foreign direct investment, trade openness, inflation, and economic growth. The long-run and short-run results indicate that FDI exerts a positive and statistically significant effect on GDP per capita, suggesting that foreign investment contributes to income growth, productivity enhancement, and economic development in West Africa. Similarly, trade openness was found to positively influence economic growth, highlighting the benefits of greater integration into global markets. Conversely, inflation exhibited a negative and significant effect on growth, underscoring the importance of maintaining macroeconomic stability. The error correction mechanism confirms a relatively rapid adjustment toward long-run equilibrium following short-run disturbances. The study concludes that attracting productive foreign investment, promoting trade liberalisation, and ensuring price stability are critical for accelerating economic growth and improving living standards in West African countries. The study therefore recommends investment-friendly policies, regional trade integration, and prudent macroeconomic management to sustain long-term economic development.