The impact of foreign direct investment on the construction sectors of Africa

Africa's economic development is constrained by grossly inadequate physical infrastructure due to wide and expanding savings-investment gap, low and declining savings rates and investment demand. Following the deleterious effect of the debt crisis of the 1980s caused by Foreign Bank Loans (FBLs), African countries adopted a paradigm shift towards a market based economic development strategy with Foreign Direct Investment (FDI) as one of its pillars. This new policy envisioned massive FDI inflows to help bridge the continent's widening savings-investment gap and facilitate the provision of physical infrastructure. This study investigated the impact of FDI inflow on the Construction Sector (CNS) and Gross Domestic Product (GDP) of African economies. The study employed econometric methodology, specifically the Vector Error Correction Model (VECM) and Panel Regression Model (PRM) with associated Panel Unit Root and Cointegration Tests, Impulse Response Functions (IRFs) and the Forecast Error Variance Decomposition (FEVD). The study used a 40 year annualised Time Series Data (TSD) from 1972 through 2011 extracted from the United Nations Statistics Department (UNSD); the United Nations Conference on Trade and Development Statistics (UNCTADStat); and the World Bank's World Development Indicators (WDI). The data covers 25 strategically selected African countries; five in each of the five UN African regions. The study finds that FDI significantly impact on both the CNS and GDP in the long run in most cases, the impact is however not robust considering the fact that FDI has no significant effect in the short run and no commensurate significant impact on the CNS and GDP of oil exporting countries. Lack of absorptive capacity and linkages/complementarities of domestic firms with foreign MNCs are the fundamental reasons for the low impact of FDI on CNS and GDP. African policy makers are advised to pursue aggressive development programme to improve the absorptive capacity of domestic firms to benefit from management, technology and knowledge spillovers from linkages/complementarities with foreign MNCs. Additionally primary export led growth; oil price shocks; Structural Adjustment Programmes; instability; and declining construction investment demand are the challenges of African Construction and Economies (ACE). The study recommends a development policy for the ACE particularly construction, diversification of African economies, reduced dependence on foreign oil imports, good governance, strong institutional capacity and deepening economic reforms to facilitate increased FDI inflow for long run construction and economic development.