Abstract

This study examines the causal relationship between Foreign Direct Investment and economic growth in Malawi and how the two interact with trade openness and inflation. The study employs vector auto regression analysis method using time series annual data from 1970 to 2005. The Granger causality tests and innovation accounting were used to investigate causal relationships among the variables. The results indicate the presence of granger causality running from economic growth to trade openness but not to FDI growth and inflation. FDI growth on the other hand was found to weakly Granger cause economic growth, trade openness and inflation. Variance decomposition analysis shows that in the long run economic growth influences all the variables significantly whereas FDI growth has a considerable impact on economic growth but not trade openness and inflation. The study further reveals that only economic growth matters in attracting FDI in the long run whereas inflation and trade openness do not make a significant contribution. The results suggest the need to come up with other measures besides liberalising the trade regime and maintaining a stable macroeconomic environment to improve the business climate in Malawi in order to attract more foreign investors into the country who will contribute to economic growth. Furthermore, policy should be geared towards maximizing the positive effects that come along with FDI.

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School	: School of Law, Economics and Government
Issued Date	: 2008

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