Exploring the Dynamic Interplay Between FDI, TFP, Human Capital, Infrastructure, and Governance in African Economies: Evidence from Panel Vector Autoregression Analysis

Abstract

Foreign direct investment (FDI), human capital, infrastructure, and governance have been argued to enhance Total Factor Productivity (TFP). However, their low levels in Africa raise doubts about their effectiveness in boosting the TFP. This study investigates the dynamic relationship between TFP, FDI, human capital, infrastructure, and governance in 30 selected African countries from 1996 to 2019 using a Panel Vector Autoregression (PVAR) approach. The results show that FDI positively correlates with TFP, while governance initially decreases TFP, indicating the need for stable institutions to mitigate the negative impacts on productivity. The PVAR-Granger causality analysis reveals a significant bidirectional causality between FDI and TFP, signifying the mutual importance of FDI and TFP growth. Governance also influences TFP, emphasizing the role of efficient governance in enhancing TFP. The forecast error variance decomposition shows that TFP is mainly influenced by innovations in the short term, with FDI and human capital becoming more influential over longer horizons. The impulse response functions indicate that FDI shocks boost TFP significantly, whereas the effects of governance on TFP vary. These findings suggest that improving human capital, governance, and infrastructure is essential to creating a conducive environment for FDI and driving TFP growth in Africa.