FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: EVIDENCE FROM LIBERIA

ABSTRACT

The study investigated the relationship between foreign direct investment and economic growth in Liberia. The Autoregressive Distributed Lag approach to cointegration was used with annual data from IMF Statistics 2009 CD ROM, WDI. Capital was disaggregated into foreign direct investment and domestic private investment for a more comparative analysis of their impacts on economic growth. Economic growth was measured by real GDP, Foreign Direct investment (FDI) was measured by Net FDI inflow as share of Real GDP. The study used gross domestic investment as a share of Real GDP as a proxy for gross fixed capital formation in real terms, and labor force was measured as a proportion of total population ages 15-65. Inflation, exports and openness were used as control variables for policy purposes. Results from the study suggest that FDI enhances economic growth in Liberia and that domestic investment highly explains economic growth in Liberia. The growth in the labour force had a positive impact on economic growth over the study period. Granger causality test shows that domestic investment causes economic growth. The results also revealed that inflation, exports and openness are critical in enhancing sustained economic growth and development in Liberia. Therefore, it is recommended that the Government of Liberia ensure a low inflation level to maintain and sustain an increase in economic growth. Incentives should be given to domestic firms to export in the form of reduced export tariffs and the government should ensure that openness to trade be more accommodating in order to acquire the necessary technologies and skills for the growth of the economy.