With Autoregressive Distributed Lag (ARDL) bound test technique to cointegration and Error Correction Model (ECM), the impact of FDI determinants on FDI to the Central African Republic (CAR) from 1965 to 2010 was empirically examined. Results show that all regressors were of the order of one [I (1)] except inflation rate [I (0)], with stable cointegrating relationship with FDI. Additionally, diagnostic tests proved that the model was correctly specified and reliable; with FDI inflow statistically and positively correlating with market size, inflation and corruption but negatively with openness to trade and political instability. Political instability had strongest negative impact; implying that FDI responds to political instability in CAR more than the rest of the explanatory variables. Therefore, in order to attract the required FDI, the security situation in the country needs to be improved and efforts must be directed towards improving the economic performance of the country by diversifying its economic activities and encouraging private participation. Furthermore, CAR needs to secure its borders by cooperating with its neighbours on possible joint border patrols. For long term policy intervention, good governance and its attendant conditions (rule of law, transparency, accountability, respect for human rights and equal opportunities) and institutions (strong and independent judiciary, opposition, media, electoral commission, security force and public services) must be pursued. Most importantly, higher education must be prioritized and implemented to foster national unity, reduce crime and conflicts, and provide employment, better salaries, and vibrant domestic economic activities to generate revenue for rapid and sustained economic development.
Table of Contents
1. Introduction
1.1. The Central African Republic (CAR)
1.2. Foreign Direct Investment (FDI)
1.3. Determinants of FDI
1.4. Determinants for CAR
2. METHODOLGY
2.1. The Model
2.2. Data and Definition of Terms
2.2.1. Foreign Direct Investments (FDI)
2.2.2. Inflation
2.2.3. GDP
2.2.4. Corruption
2.2.5. Terms of trade
2.3. Autoregressive Distributed Lag (ARDL) Bound Test Technique
3. Results and Discussions
4. Policy implication and way forward
5. Limitations
6. Conclusions
Objectives and Research Themes
The primary objective of this research is to empirically examine the impact of various determinants on foreign direct investment (FDI) inflows into the Central African Republic (CAR) between 1965 and 2010, utilizing an econometric framework to identify why the country struggles to attract investment and to provide policy recommendations for economic development.
- Impact of macroeconomic variables on FDI attraction in CAR.
- Analysis of the relationship between political instability and foreign investment.
- Evaluation of the role of corruption and market size on economic performance.
- Implementation of the ARDL bounds test technique for cointegration analysis.
- Policy interventions for sustainable economic growth and institutional improvement.
Excerpt from the Book
1.4. Determinants for CAR
Political instability, bad governance, misguided policies, poor infrastructure, and hostile environments are the main factors seen to be responsible for the poor FDI inflow to typical developing nations like CAR (Akinlo, 2003; Lemi and Asefa, 2003; Bende-Nabande, 2003; Asiedu, 2002); nonetheless, Li Shaomin reported that poor governance and hostile environments do not deter FDI inflow to developing nations, though his study was on China (Li, 2005). Another contention is that exports from those nations are largely undiversified and heavily raw material oriented, making them less competitive in attracting foreign investment (Rotberg, 2008). Instability is possibly the main problem of CAR (BBC, 2008 a, b; Ghura and Mercereau, 2004). Rogoff and Reinhart computed global susceptibility to war and indicated that wars are likely to occur in developing nations (Africa) than in any other part of the world. The susceptibility index for Africa was the highest; about 26.3%. They then showed negative correlation between FDI inflow and conflicts (Rogoff and Reinhart 2003; Collier et al, 2003). Sachs and Sievers echoed this issue arguing that instability (due to high incidence of war, frequent military interventions, religious and ethnic conflicts) is the most important determinant that hinders FDI inflow to developing nations (Sachs and Sievers, 1998).
Summary of Chapters
1. Introduction: Provides background on the socio-economic status of the Central African Republic, defines foreign direct investment, and discusses relevant literature regarding FDI determinants.
2. METHODOLGY: Describes the econometric model, defines the data variables used, and explains the application of the Autoregressive Distributed Lag (ARDL) bounds test technique.
3. Results and Discussions: Presents the empirical findings of the study, including the cointegration results and the correlation between FDI and the selected explanatory variables.
4. Policy implication and way forward: Offers strategic policy recommendations based on the regression results to improve FDI inflows and stimulate national economic growth.
5. Limitations: Acknowledges constraints in the study, specifically the limited availability of data for certain potential variables.
6. Conclusions: Summarizes the study's findings, confirming that political instability is a major deterrent to FDI and that the model used is reliable.
Keywords
Cointegration, ARDL Bounds test, FDI determinants, Central African Republic, Foreign Direct Investment, Economic Growth, Political Instability, Corruption, Market Size, Inflation, Trade Openness, Econometric Analysis, Infrastructure, Developing Nations, Policy Intervention.
Frequently Asked Questions
What is the fundamental focus of this research paper?
This paper examines the factors that influence the flow of foreign direct investment (FDI) into the Central African Republic from 1965 to 2010 to understand the causes of low investment attraction.
What are the primary thematic areas covered?
The study covers the impact of political instability, market size, inflation, corruption, and trade openness on FDI inflows in the context of a fragile, landlocked developing economy.
What is the core research goal?
The goal is to empirically identify the determinants of FDI in the CAR and provide evidence-based policy suggestions to foster economic stability and development.
Which scientific methodology is utilized in the study?
The authors employ the Autoregressive Distributed Lag (ARDL) bounds test technique to analyze cointegration, alongside an Error Correction Model (ECM) for short-run and long-run dynamics.
What topics are discussed in the main body?
The main body discusses the theoretical and empirical literature on FDI, details the model specification and data sources, and presents the regression analysis and diagnostic tests.
Which keywords best describe this study?
Key terms include Cointegration, ARDL Bounds test, FDI determinants, Political Instability, and Central African Republic.
How does political instability specifically affect FDI in the CAR?
The study finds that political instability has the strongest negative impact on FDI, meaning that foreign investors respond more significantly to instability in the CAR than to other economic variables.
What is the role of corruption in the CAR's economic context?
Interestingly, the study finds a positive correlation between corruption and FDI in the CAR, which the authors interpret through the lens of countries with weak rule of law, consistent with the findings of Houston (2007).
What does the study suggest for long-term policy?
The authors suggest pursuing good governance, securing borders through regional cooperation, diversifying economic activities, and prioritizing higher education to foster national unity and productivity.
Why was the ARDL approach chosen over other econometric methods?
It was chosen because the data proved to be a mixture of stationary [I(0)] and integrated [I(1)] variables, and the ARDL technique allows for establishing cointegration regardless of the integration order of the variables.
- Quote paper
- Babette Zoumara (Author), Presley K. Wesseh, Jr. (Author), 2012, The Impact of FDI Determinants on FDI inflow to the Central African Republic, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/269313
