Foreign capital flows, exports and growth in Zambia. A VECM approach.

Abstract

This study investigates the causality between FDI net inflows, exports and GDP using Vector Error Correction Model (VECM) approach. The words foreign capital flows and FDI are used interchangeably in this study. The findings from the VECM estimation technique is six fold: (1) the study revealed a long run causality relationship running from exports and GDP towards FDI, (2) the study showed a non–significant long run causality relationship running from FDI and exports towards GDP and (3) the existence of a weak long run causality relationship running from FDI and GDP towards exports in Zambia. The study also found out that no short run causality relationship that runs from FDI and exports towards GDP, short run causality running from FDI and GDP towards exports does not exist and there is no short run causality relationship running from exports and GDP towards FDI. Contrary to the theory which says that FDI brings along with it a whole lot of advantages (FDI technological diffusion and spill over effects), the current study found that the impact of FDI in Zambia is not significant in the long run. This is possibly because certain host country locational characteristics that ensures that Zambia can benefit from FDI inflows are not in place or they might be in place but still not yet reached a certain minimum threshold levels. This might be an interesting area for further research. On the backdrop of the findings of this study, the author recommends that the Zambian authorities should formulate and implement export promotion strategies and economic growth enhancement initiatives in order to be able to attract more FDI.