Investigating The Causal Relationship Between Foreign Direct Investment And Economic Growth In Namibia

ABSTRACT  

The study investigated the causal relationship between economic growth and foreign direct investment in Namibia. It used annual secondary time series data covering the period between 1980 and 2016 for the following variables: economic growth, foreign direct investment and manufacturing. The study employed Vector Error Correction (VECM) Model to analyse the data. The time series properties of the data were analysed using Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests. The existence of the long-run relationship between the variables was assessed through Johansen cointegration test whereas, the nature of the causal relationship between the variables was tested by employing Granger causality test.  

Firstly, the results of ADF and PP unit root tests showed that all the variables considered for the study are integrated of order zero i.e. I(0). This confirms that, the three variables have zero means, constant variance and uncorrelated residual over time. Secondly, the Johansen cointegration based on Maximum Eigen and Trace statistic results revealed the presence of cointegration among the variables at 5% level of significance, implying a long-run relationship between the variables. Finally, the Granger causality test results prove a bidirectional causality between economic growth and foreign direct investment, whereas, manufacturing was found to Granger causes economic growth, a case of unidirectional causality since the results indicated that economic growth does not Granger causes manufacturing in Namibia. 

The study concluded that, foreign direct investment and manufacturing are the engine of growth in Namibia and economic growth is an important factor that determines the level of foreign direct investment in the country. It is therefore recommended that the Namibian government should work toward the development of new national policies and economic strategies to stimulate economic growth and foreign direct investment. The government should also implement the policies and initiatives that are currently in place so that foreign investors are attracted to the country. This in the end promotes economic growth. In addition, the government should strengthen its measures to increase the share of manufacturing sector in the economy.