THE EFFECT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN SIERRA LEONE

Abstract

The paper investigates the effect of foreign direct investment on economic growth in Sierra Leone. A model of real GDP growth was estimated with annual data from 1980 to 2022. Tests for stationarity were done in order to avoid spurious regression by using the Dickey-Fuller GLS test and a battery of structural break tests. An auto-regressive distributed lag model (ARDL) was estimated using the Ordinary Least Squares, following the transformation of non-stationary variables to obtain stationarity, which was the case for terms of trade only. A parsimonious model was then obtained from an over-parameterized model. The model results show that foreign direct investment (FDI) has a significant positive effect on economic growth, with a one percentage point of GDP increase in foreign direct investment increasing real GDP growth by 0.49 percentage point in the same year. Hence, policies that encourage more foreign direct investment in Sierra Leone are to be strengthened. Also, for enhanced poverty reduction, tilting foreign direct investment towards the agricultural sector to enhance agricultural transformation is imperative for a more productive agricultural sector, as a large chunk of Sierra Leone’s labor force, population, and the poor are in the rural areas, where agriculture is the predominant activity. JEL: F21, F43 Article visualizations: