The Impact of Trade Openness and Foreign Direct Investment on Human Development in Sub-Saharan African Countries: Evidence from Panel Data

Abstract

This study investigates the impact of trade openness and foreign direct investment on human
development. The study is based on data from 29 sub-Saharan African countries from 2010 to
2019. We used panel cointegration and a panel vector error correction model for econometric
analysis. Besides, the study also attempted to determine the direction of causality among the
dependent and independent variables. The empirical result of the study indicates that both trade
openness and foreign direct investment have a positive and significant effect on the human
development level of sub-Saharan African regions in the long run. Per capita GDP also has a
positive and significant impact on the region's long-run human development. In contrast, foreign
aid has a negative effect on the human development of sub-Saharan African countries both in the
long and short run, and inflation has a negative effect on the region's long-term human
development despite its positive effect in the short run. Hence, this study recommends promoting
additional foreign investment activities by implementing effective policy tools, creating conducive
environments to attract substantial foreign direct investment to the region, and encouraging its
foreign investors to participate more in welfare-building activities. Secondly, the research also
recommended developing policies that reduce tariff and non-tariff barriers to trade and facilitate
the exchange of goods and services between countries by increasing trade agreements. Thirdly,
instead of focusing on meeting basic humanitarian needs, development partners should tie their
aid into social sector development such as education and health to have a greater impact on human
development.