The Impact of Foreign Direct Investment inflows on Manufacturing Value Addition in Zambia

Abstract

This study investigates the impact of Foreign Direct Investment (FDI) on Manufacturing Value Addition in Zambia from 1990 to 2023 using annual data. The general objective was to assess how FDI net inflows, GDP per capita, merchandise trade and Inflation Rate affect manufacturing value addition in Zambia. Given the stationarity of all variables at first difference and the presence of cointegration relationships, a Vector Error Correction Model (VECM) was estimated. The long-run results revealed that FDI net inflows had a significant positive impact on manufacturing value addition while inflation rate and GDP per capita had a negative long run relationship with manufacturing value addition in Zambia. With regards to the short-run relationships among the variables in the model, an Error Correction Model (ECM) was employed to analyze the annual time series data. The results showed that the first and second lags of manufacturing value addition had a positive effect on current manufacturing value addition in the short run. Contrary, the coefficients of the first and second lags of GDP per capita and inflation rate had a negative effect on manufacturing value addition in Zambia in the short run. Notably, results through the error correction term revealed that the system would readjust to equilibrium at a speed of 86.45 percent in the long run. Additionally, a short-run causal relationship was noted where inflation rates and GDP per capita significantly influenced manufacturing value addition, pointing to a bidirectional relationship between these variables. Furthermore, while FDI net inflows was observed to granger cause GDP per capita and merchandize trade in the long run, results revealed that there was no direction of causality between manufacturing value addition and FDI net inflows. As such, the study has thus recommended on the need for future studies to explore whether the impact of FDI net inflows varies across different sub-sectors of manufacturing to mention but a few.