THE RELATIONSHIP BETWEEN DOMESTIC INVESTMENT AND FOREIGN DIRECT INVESTMENT IN SUB SAHARAN AFRICAN COUNTRIES. A STATIC MODEL ANALYSIS

Abstract

This paper investigate the relationship between Domestic Investment, Foreign Direct Investment, Official Development Assistance, Inflation among Eighteen (18) Sub Sahara African Countries span the period 1981 to 2011 using Panel Data estimation, the study posit the magnitude to which Domestic investment can possibly be influenced by macroeconomic indicators in the region. However, the result of Hausman specification test revealed that the Fixed Effect Model is appropriate for adoption. Thus, the result of Fixed Effect estimation indicates that Foreign Direct Investment (FDI) has negative although non-significant effect on Gross Capital Formation. Official Development Assistance and Inflation have a negative and significant effect on Gross Capital Formation in Sub Saharan Africa. However market size proxy as GDP posits a positive and significant effect on Gross Capital Formation. Policy makers will therefore be informed on the contemporary interactions of economic indicators particularly in policy appraisals. Policy recommendation is that although FDI impact negatively but non-significant on gross fixed capital formation, there is need to allow for FDI inflow so that domestic firms can acquire more skills, technology and reduced cost of production thus, this is possible in the context of liberalization process.