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Effects of foreign direct investment on industrial development in Sub-Saharan Africa: the role of exchange rate misalignment

Author

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  • Kirsi Zongo

    (University Thomas SANKARA)

  • Mahamadou Diarra

    (University Norbert Zongo)

  • Idrissa M. Ouedraogo

    (University Aube Nouvelle)

Abstract

The aim of this article is to analyze the role of exchange rate misalignment in explaining the effects of foreign direct investment (FDI) on industrial development in Sub-Saharan Africa. To this end, the ARDL model was used to analyze the nature of exchange rate misalignment, before mobilizing spatial econometrics to examine its role in explaining the effects of FDI on industrial development. The estimates show that: (1) the exchange rate of SSA countries registers positive deviations (overvaluation) and negative deviations (undervaluation) of the exchange rate, and that these effects are more pronounced in countries with fixed exchange rate regimes; (2) FDI has positive effects on industrial development, but undervaluation amplifies these effects, while overvaluation attenuates them. The article recommends adopting exchange rate undervaluations and improving the business climate to encourage massive FDI inflows and job creation in the manufacturing sector.

Suggested Citation

  • Kirsi Zongo & Mahamadou Diarra & Idrissa M. Ouedraogo, 2024. "Effects of foreign direct investment on industrial development in Sub-Saharan Africa: the role of exchange rate misalignment," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 51(4), pages 925-955, December.
    • Handle: RePEc:spr:epolin:v:51:y:2024:i:4:d:10.1007_s40812-024-00314-3
    DOI: 10.1007/s40812-024-00314-3
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    More about this item

    Keywords

    Exchange rate; Undervaluation; Industrial performance; Spatial econometrics; Sub-Saharan Africa;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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