The Impact of Foreign Direct Investment on Total Factor Productivity growth in Sierra Leone

Abstract

The broader objective of this study is to examine the impact of Foreign Direct Investment (FDI) on Total Factor Productivity Growth in Sierra Leone. Considering these observations, this study measures the impact of FDI on Sierra Leone’s Total Factor Productivity (TFP) Growth and consequently on economic growth. This study covers the sample period 1990- 2020 employing time-series data. To achieve this end, the study brought together the dependent variables as well as FDI and other explanatory variables as a pioneer in economic analysis in the context of Sierra Leone as a least developed nation. As such, to understand the impact of FDI and other explanatory variables on Sierra Leone’s TFP growth, this study employed the latest econometric techniques to achieve the stated objectives using Sierra Leone’s data. In this respect, first cointegration analysis was introduced to capture long-run relationships among variables. Second, to capture short-run relationship among variables a systems simultaneous equation was developed. Following this approach, employing Vector Error Correction Mechanism (VECM) procedure the simultaneous equation was simulated. The empirical findings indicate that FDI contributes to Sierra Leone’s TFP growth. However, though FDI contributes to economic growth, the marginal effect was small. This is partly attributed to Total Factor Productivity (TFP), as explained by the Solow Swan Model and the absorption capacity of Sierra Leone being a least-developed country. The result also reveals that unlike physical capital, the effect of human capital development on growth was very small.  Going by the findings and conclusions drawn from this study, recommends among other things were made-improving the nation’s absorptive capacity so as to promote future foreign direct investment.