The Impact of Trade Openness and Foreign Direct Investment on Economic Welfare in sub-Saharan Africa

Abstract

The sub-Saharan African region is characterized by a high relative degree of openness to trade. The region is also identified with increased inflows of foreign investments with no significant welfare improvement. Economic development emphasizes that the lack of domestic investment in the developing economies could be boosted by trade openness and inflow of Foreign Direct Investment (FDI) for impactful enhancement of capital formation. In this article, the impact of trade openness and foreign capital inflow on economic welfare was examined on a sub-regional analysis for sub-Saharan Africa. The study also appraised the effect of openness to trade and FDI inflow on the region's economic welfare. The data for 30 countries from 2000 to 2018 were collected and analyzed, with the Generalized Least Square (GLS) technique to fit the model developed. The study showed that openness to trade has a significant impact on economic welfare for all sub-Saharan Africa regions, while FDI is only significant for the Western sub-region. Hence, the study recommends that the government of the countries in the sub-Saharan Africa region should boost trade openness to enhance efficiency in productivity, and improve industrial development.