Foreign Direct Investment–Trade Balance Nexus in Sub-Saharan Africa

Abstract

We investigate the nexus between foreign direct investment (FDI) and trade balance in Sub-Saharan Africa (SSA). We employ balanced annual panel data for 20 SSA countries spanning the period 2005–2024, sourced from the World Development Bank. To address potential endogeneity, unobserved heterogeneity, and dynamic panel bias, we utilize the Generalized Method of Moments (GMM) estimator. Empirical results reveal that both lagged trade balance and FDI exert a positive and statistically significant influence on the current trade balance. The coefficient of the lagged trade balance (0.2617) indicates partial adjustment dynamics, suggesting that approximately 26.2% of past trade balance conditions persist into the current period. Furthermore, the FDI coefficient (0.1035) implies that a 10% increase in FDI inflows leads to an estimated 1.03% improvement in the trade balance, ceteris paribus. The findings underscore the critical role of FDI in strengthening external sector performance in SSA by enhancing export capacity, improving productive efficiency, and alleviating foreign exchange constraints. We conclude that FDI is a significant driver of trade balance sustainability in the region. We recommend policies aimed at attracting export-oriented FDI, enhancing domestic absorptive capacity through strategic investments in human capital and infrastructure, and implementing complementary trade and industrial policies to maximize FDI spillovers.