Industrialization, FDI and absorptive capacities: evidence from African Countries

Abstract

This paper assesses the effect of foreign direct investment (FDI) on the industrialization of African economies. In particular, we address the nonlinearity issue and investigate the role of the recipient countries' absorptive capacities as a catalyst of foreign investments' spillover effects. The empirical framework considers a panel of 46 countries over the 1998-2019 period. The SGMM estimates highlight a two-threshold relationship between FDI and industrial output. FDI should range between an upper and a lower bound to produce a positive effect on domestic industries. Our findings also suggest that weakly industrialized countries and countries endowed with high absorptive capacities are those taking advantage from the spillover effects generated by FDI. Finally, estimation results reveal that financial development, human capital, infrastructure and the legal framework are the main channels through which FDI contributes to promote the industrialization process in Africa. 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.