The Role of Foreign Direct Investment on Economic Growth: Evidence from Comoros

Abstract

This study examines the impact foreign direct investment (FDI) on economic growth in Comoros. Specifically, the study also addresses the question of how foreign direct investment affects sectoral economics such as agriculture, industry, and services economic growth. The study uses a time series of secondary data ranging from 1981 to 2022. The study employed annual real GDP per capita growth, agricultural economic growth as a share of GDP, manufacturing sector growth as share of GDP and services sector as a share of GDP as a dependent variable. The variable of interest for this study is FDI, whereas export, domestic saving, and domestic credit are controlled by the study model as macro-economic variables regressors. Data was obtained from world bank development indicators. The collected data was analyzed using descriptive statics and regression analysis. The unit root test and cointegration test was conducted to the suitability of the variables data for the proposed study model. The ARDL bounds testing approach was adopted for the analysis of the relationship between foreign direct investment and economic growth. E-views 13 statistical tools were employed for analysis. The ARDL regression analysis results of this study show that even though individual variables may have less significance in the equation of the level, there exists a long-run relationship between the variables that influence growth. The error correction model establishes that the long-term interdependencies are stable and that there is a gradual convergence of the short-run fluctuations to equilibrium. The research finding revealed that FDI has insignificantly impacted the aggregate and sectoral economic growth in Comoros economy. Furthermore, the ARDL regression analysis results demonstrated that other control variables such as export has a statistically positively significant impact on agricultural and manufacturing growth, while its impact on service economic growth shows a significant negative effect. In addition, this study confirms that domestic savings are a major driver influencing the service sector growth in the Comoros economy. The final implication of this study suggests that, for Comoros, the attainment of sustainable economic growth requires specific policy measures pertaining to export efficiency, effective use of savings, and financial resource allocation in conformation with the requirements of different sectors.