Foreign Direct Investment, Savings and Foreign Exchange Gaps: The African Experience

Abstract :

The African region like other developing regions of the world are characterised by limiting factors of skills, savings and foreign exchange gap. The flow of FDI should bring with it, foreign skills and technology to reduce the skills limit by technology diffusion, while investment will reduce the savings limit and equally the foreign exchange limit. The main objective of the study is to ascertain the extent to which the gaps of skills, savings and foreign exchange has been closed by the inflow of foreign capital in the selected host African countries. Panel data was utilized for 39 African countries. The  results indicates that the inflow of FDI has not closed the investment and foreign exchange gaps of the selected host African countries, rather has become wider unlike what is obtainable in other developing regions of the world like Asia. The study concludes by recommending that government of host economies should carefully select sector of FDI inflow to be such as will impact on domestic investment, and not just capital intensive resource exploitation which often crowd out domestic investment. Also, policies should be put in place to encourage domestic investment, industrialisation, to enable the region to be more producing inclined rather than consuming and hence, improving balance of payment position. These will gradually aid in closing both investment and foreign exchange gaps alike, thereby, bringing about vibrant economic activities, increased investment and the desired development in the region.