Foreign Direct Investment and Total Factor Productivity Growth Nexus: A Realistic Testimony from VECM Approach

Justicia Nanah Allie^1, and Isaac Adjei Mensah^2,

¹School of Finance and Economics, Jiangsu University, Zhenjiang, PR. China

²Institute of Applied Systems Analysis (IASA), Jiangsu University, Zhenjiang, PR. China

Cite this paper:
Justicia Nanah Allie and Isaac Adjei Mensah. Foreign Direct Investment and Total Factor Productivity Growth Nexus: A Realistic Testimony from VECM Approach. Journal of Finance and Economics. 2019; 7(4):118-126. doi: 10.12691/jfe-7-4-2

Abstract

The main focus of current paper is to investigate the effect of foreign direct investment (FDI) on growth of total factor productivity (TFP) of Sierra Leone using financial development (FD) and trade openness (TR) as intermittent variables for the period 1990-2016. Further, this paper intends to identify the direction of causal affiliations amid employed series. Base on the application of ADF and PP-Fisher unit root tests as well as JJ co-integration tests respectively, all variables used are stationary at the first difference and also co-integrated. Through the estimation a proposed TFP model using the VECM framework, FDI is evidenced to have a significant positive effect on TFP when all other factors are held constant. Findings from the Granger causality test further revealed unidirectional liaison from FDI to TFP in the long-run whilst bidirectional causality is evidenced in the short-run. We therefore conclude that in order to increase the positive externalities and spillover benefits of FDI at the corporate level, Sierra Leone could provide assistance to foreign investment companies in management and worker training.

Keywords:
foreign direct investment total factor productivity vector error correction Sierra Leone

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