Determinants of Foreign Direct Investment Inflows in Namibia
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Determinants of Foreign Direct Investment Inflows in Namibia Research Assignment presented in partial fulfilment of the requirements for the degree of Masters of Management in Finance and Investments by Penehafo N.T.T Hangula March 2016 Supervisor: Professor Odongo Kodongo DECLARATION I, Penehafo N.T.T Hangula, declare that the entire body of work contained in this research paper is my own and have not previously been submitted for a degree at this or any other university. Signed………………………………. Date…………………………………. P.N.T.T Hangula 768609 i ACKNOWLEDGEMENT I am grateful for the support and encouragement of my family. I would also like to express my gratitude towards my parents, who helped me from an early age to appreciate the importance of a good quality education. I thank my siblings for all their support and encouragement. I thank my friends for their encouragement and prayers. I would like to thank the Payment division at Namibia Student Financial Assistance Fund (NSFAF), for their patience and support and for granting me permission to embark on this journey, despite the pressure associated with my work. I am grateful to everyone that helped me in one way or another in collecting my data, especially BON and NSA employees. I also want to sincerely thank my supervisor, Professor Odongo Kodongo, who generously provided me with the guidance necessary for me to undertake and complete this dissertation. I am grateful for all the support he rendered. I shall always be grateful for the skills he imparted to me. Finally, I would like to thank God for giving me the Grace and strength I needed to undertake Master’s Degree. ii ABSTRACT This study investigates the dominant determinants of Foreign Direct Investment in Namibia. The second part of the study evaluates whether FDI received in Namibia is beneficial for the Namibian economy. The study uses two different methods to test for stationarity: Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP). The study makes use of the Ordinary Least Square (OLS) in conjunction with the cointegration (CI) and Error Correction Models (ECM) to determine the factors that influence FDI in Namibia, using data for the period of 1990- 2014. The results show that, in the short-run, Foreign Direct Investment is significantly influenced by GDP, taxes, exchange rates and Drought occurrence. The results of the second part of the study were to test whether FDI received is beneficial for the Namibian economy. The Granger causality test was used to test this relationship. The results of the Granger causality test revealed that FDI is indeed beneficial for the economy. Hence, it is significant in explaining GDP in Namibia. The study recommends a review of the administration of the current investment system, which should highlight the role of each player in the economy. The study further recommends that a good quality of governance, reduced bureaucracy, low-interest rate and well-developed infrastructure will enhance investor’s confidence. Expansionary fiscal and monetary policies should be applied to stimulate GDP growth and to increase Foreign Direct Investment. Keywords: Foreign Direct Investment, Gross Domestic Product, Stationarity, Cointegration, Error Correction Modelling, Taxes and Exchange Rates. iii TABLE OF CONTENTS DECLARATION ..................................................................................................................................... i ACKNOWLEDGEMENT ...................................................................................................................... ii ABSTRACT ........................................................................................................................................... iii LIST OF TABLES ................................................................................................................................ vii LIST OF ACRONYMS ....................................................................................................................... viii CHAPTER 1 ........................................................................................................................................... 1 INTRODUCTION AND BACKGROUND OF THE STUDY .............................................................. 1 1.1 INTRODUCTION ........................................................................................................................ 1 1.1.1 Overview of the Namibian Economy .................................................................................. 2 1.2 FOREIGN DIRECT INVESTMENT TRENDS IN NAMIBIA ............................................................. 3 1.3 MOTIVATION AND PROBLEM STATEMENT .............................................................................. 5 1.3.1 Motivation ........................................................................................................................... 5 1.3.2 Global and Regional Trends in Foreign Direct Investment ................................................ 6 1.3.3 Regional FDI Trends ........................................................................................................... 7 1.4 PROBLEM STATEMENT ............................................................................................................ 9 1.5 RESEARCH QUESTIONS ............................................................................................................ 9 1.6 SIGNIFICANCE OF STUDY ...................................................................................................... 10 1.7 DELIMITATIONS OF THE STUDY ............................................................................................ 10 1.8 ORGANIZATION OF THE STUDY ............................................................................................. 10 CHAPTER 2 ......................................................................................................................................... 11 LITERATURE REVIEW ..................................................................................................................... 11 2.1 INTRODUCTION ...................................................................................................................... 11 2.2 THEORETICAL BACKGROUND ................................................................................................ 11 2.2.1 Eclectic (OLI) paradigm of international production ........................................................ 11 2.2.2 Ownership advantages (O) ................................................................................................ 11 2.2.3 Internalization advantages (I) ............................................................................................ 12 2.2.4 Location advantages (L) .................................................................................................... 12 2.2.5 Resources based theory ..................................................................................................... 12 2.3 EMPIRICAL LITERATURE REVIEW ......................................................................................... 13 2.3.1 Empirical studies in Namibia ............................................................................................ 14 2.3.2 Empirical literature of rest of Africa studies ..................................................................... 16 2.3.3 Empirical Literature beyond Africa .................................................................................. 21 2.4 CHAPTER SUMMARY ............................................................................................................. 29 2.4.1 Theoretical review summary ............................................................................................. 29 2.4.2 Empirical Summary: Africa and Outside Africa ............................................................... 29 2.4.3 Summary of literature in Namibia..................................................................................... 29 2.4.4 Gap in the existing literature: Namibia ............................................................................. 30 CHAPTER 3 ......................................................................................................................................... 31 DATA AND METHODOLOGY .......................................................................................................... 31 iv 3.1 INTRODUCTION ...................................................................................................................... 31 3.2 DATA ..................................................................................................................................... 31 3.2.1 The Dependent Variable ................................................................................................... 31 3.2.2 The Explanatory Variables ................................................................................................ 31 3.3 MODEL SPECIFICATION ......................................................................................................... 33 3.3.1 Static Ordinary Least Squares (OLS) Estimation ............................................................. 33 3.3.2 Cointegration Technique ................................................................................................... 34 3.3.3 Error Correction Model Technique ................................................................................... 35 3.4 THE MODEL ..........................................................................................................................