A framework of macroeconomic drivers of foreign divestment in African Countries

Abstract

The act of foreign divestment (FD) is an inescapable decision undertaken by multinational enterprises (MNEs). However, the consequences of macroeconomic variables on FD are yet to be thoroughly examined. Furthermore, despite FD being a widespread phenomenon within the international business domain, there is scant literature on the topic, particularly in Africa. The study therefore aims to develop the framework of the macroeconomic drivers of FD in African countries using annual data from 2000-2020. Owing to the dynamic nature and behaviour of macroeconomic variables susceptible to endogeneity and multicollinearity problems, a variety of econometric techniques were employed. These include the 2-step generalized method of moments (GMM), Autoregressive Distributed Lag (ARDL), and Pairwise Dumitrescu Hurlin Granger Panel Causality Tests. Furthermore, the fixed effect, random effect, pooled effect, and feasible generalised least squares (FGLS) were utilised for robustness and comparison purposes. To be specific, this study sought to identify the key FD drivers and subsequently develop an FD framework in African countries. The empirical evidence revealed that economic growth, natural resources, exchange rate, unemployment, trade openness, human capital development, inflation, political instability, and financial development were identified as the key FD drivers in African countries. Financial development and political instability were found to have a positive but insignificant impact on FD. On the other hand, economic growth, natural resources, exchange rate, unemployment, trade openness, human capital development, and inflation were found to have a negative and significant influence on FD. Following the identification of the key drivers of FD in African countries, the short and long-run co-integration relationship between FD, financial development (FIN), and economic growth was explored. Using the ARDL method, a positive and significant long-run relationship between FD and financial development was revealed. Interestingly, a negative and significant long-run relationship between economic growth and FD was found. It was also found that there was an inverse relationship between FD and FIN in the short run, whereas short-term economic growth results displayed a positive and significant relationship with FD. On the existence of a unidirectional or associated causation between FD and economic growth in the African continent, no evidence of such an association could be established. Notwithstanding iv this finding, there was a bidirectional causal relationship between FD and FIN. Considering the above results, a framework to mitigate FD was developed, thus signifying the contribution of the study. Policymakers in African countries should focus on implementing policies that promote economic growth, trade openness, HCD, and reduced unemployment to curb FD outflows. Additionally, based on the study's findings, policymakers in African countries should prioritise implementing policies aimed at promoting economic diversification, enhancing trade openness, investing in human capital development, and fostering a stable exchange rate regime to mitigate foreign divestment outflows effectively. Lastly, it is recommended that the adoption of good governance practices to improve government effectiveness in FD management remain a priority of every government in Africa.