Services play a critical role in the operation of regional and global value chains. Estimates from the OECD-WTO TiVA database show that services account for double the share of global trade suggested by balance of payments data. Nearly 60 percent of international trade in services is transacted via commercial presence. Foreign direct investment (FDI) is thus a key channel for the international provision of services and associated transfers of knowledge and know-how. Extant research has studied the impact of FDI on economic growth; as a source of employment and capital for the domestic economy; and in enhancing productivity growth. By enhancing productive capacity in host countries and via positive spill-over effects on local firms, FDI also promotes both backward and forward participation in regional and global value-chains (GVCs). This project examines the effects of both inward and outward greenfield investment on African host and source countries’ participation in GVCs.
The empirical analysis is based on an augmented structural gravity model using data on announced greenfield investment from fDi Markets and that on measures of backward and forward participation in value-chains constructed using the EORA MRIO database (Lenzen et al. 2012, 2013) over 2003-2022 for a sample of African countries and their bilateral partners within and outside the continent.
Attracting FDI is a significant policy priority for low-income countries, including those in Africa. However, UNCTAD data show that the continent attracts less than 3 percent of global FDI. Empirical evidence on the positive link between FDI and value-chain integration across Africa is likely to further incentivize policy action towards dismantling investment barriers within the continent, including via the African Continental Free Trade Area (AfCFTA). While there is some work exploring the FDI-GVC-integration relationship empirically for central and east-European economies (Buelens and Tirpák, 2017) and five North African countries (Del Prete et al. 2018), existing literature has largely studied causality in the other direction i.e. the impact of GVC integration on FDI and mostly for the developed world (Carril-Caccia and Pavlova, 2018; Martínez-Galán and Fontoura, 2019). This project adds value by examining the effects of both inward and outward greenfield investment on African host and source countries’ participation in GVCs accounting for endogeneity in the investment-GVC relationship.
