Foreign Direct Investment and Economic Growth Relationship in Sub-Saharan Sierra Leone: The Application of the VAR and VECM Models

Abstract

The purpose of the research investigation was the examination of a possible long-run and short-run relationships among foreign direct investment (FDI) inflows, economic growth, and supplementary macroeconomic elements in post-conflict Sub-Saharan Sierra Leone for the period, 2002-2021. The study methodology was quantitative, and the relevant dataset was time series with 80 observations and 6 variables. Applying the vector autoregression model, the findings revealed FDI, and economic growth exclusively had long-run associations with their determinants. In addition, applying the vector error correction model, the findings realized gross fixed capital formation, carbon dioxide, and inflation exclusively had positive and statistically significant short-run relationship with foreign direct investment. In the reverse alternative, inflation and trade had productive and statistically noteworthy short-run relationships with gross domestic product. Evidently, the sturdy positive effect of gross fixed capital formation on FDI inflows in the short-run, for example, suggested an augmented public sector investment shortly in the aftermath of the civil-strife lured excellent FDI inflows, which likely transmuted into an exceptional gross domestic investment and enhanced greater economic expansion in the country. Additionally, the robust positive effect of inflation on FDI inflows in the short-run, for example, indicated a domestic economic stability triggered by low rate of inflation, which enhanced the return on foreign direct investment in the short-run. In the inverse model, the positive effect of trade openness on gross domestic production in the short-run, suggested the lessening and exclusion of trade barriers, including import regulations shortly in the aftermath of the civil strife, enhanced protracted trade and economic expansion in the country. The results had substantial applied and policy extrapolations because of the striking necessity for open economic actions to enhance macroeconomic steadiness, market, and economic growth, which may decrease the obscured risk to international investors that could support the surge in FDI inflows for investment and economic advancement in the country.