Effect of foreign direct investment on structural transformation in West African Economic and Monetary Union (WAEMU) countries

Abstract

Foreign Direct Investment (FDI) is widely recognized as an engine of the structural transformation in development theories. We analyzed the effects of FDI on the structural transformation in West African Economic and Monetary Union (WAEMU) countries by considering the industry, manufacturing, agricultural, and services sectors for the period spanning from 1990 to 2017. Using the Panel Corrected Standard Errors (PCSE) estimation technique, we showed the neutrality hypothesis of FDI inflows on industrial, manufacturing and agricultural productivity in the WAEMU region. However, findings showed positive effect of FDI inflows on services sector’s productivity. We also found that domestic credit was not an important determinant for structural transformation in WAEMU countries, except for the services sector. Moreover, findings showed that the institutional quality indicator is relatively low in WAEMU region and has negative relationship with agricultural productivity, while it increases services sector’s value added. These results imply that the low institutional quality in WAEMU may lead to the failure in the design and implementation of reliable agricultural policies of the region which may not attract the FDI, resulting in the negative effect of FDI on structural transformation in the region. Rethinking about the design and implementation of domestic development policies and promoting actions that can attract FDI in sectors with positive ripple effects, including industry, manufacturing, agriculture and services sectors are recommended for the structural transformation of the economy of WAEMU countries.

Keywords

• fdi
• structural transformation
• waemu