An Empirical Investigation of the Dynamic Linkages among Foreign Direct Investment, Economic Growth, and Governance in CEMAC Countries: A Panel VAR Analysis

Abstract

Economic Growth and the inflow of investments in CEMAC countries have been frequently attributed to the quality of governance. Good governance might, in turn, be attributed to the level of investments flowing into these countries as well as being a source for inclusive and sustainable economic growth. The main purpose of this study is to empirically investigate (plausible) the interaction between FDI inflows and market and economic dynamics of host countries using panel VAR model and a more robust Bayesian VAR approach in CEMAC countries over the years 1990−2019. All preliminary statistics, the VAR estimates, as well as structural dynamics are presented using EViews software package. The results show that there is a significantly positive impact of FDI inflows on economic growth. Governance and economic growth do not influence the flow of FDI into CEMAC countries. Based on the Granger causality test, we found a unidirectional causality running from FDI to economic growth. This shows that FDI is important for the growth of CEMAC economies, but the growth of the economy and the quality of aggregate governance do not help investors in making a decision to invest. Also, FDI inflow and growth of the economy do not encourage better governance. This might point to the investigation of individual dimensions of governance to see which is peculiar in CEMAC countries. Our results also show significant improvement in the estimates with the use of Bayesian method for the Minnesota prior.