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variables are measures of macroeconomic uncertainty and security risk of investing in the

host country.

Economic growth is specified as a positive function of labour resources, openness

to trade, gross domestic investment and FDI. Exchange rate overvaluation is expected to

have negative effect on growth. The channel of impact is not direct. But it is believed

that an overvalued exchange rate will discourage export and lead to a deterioration of the

balance of trade which directly reduces the GDP through the national income identity.

3.2

Data and Estimation technique

The interplay between macroeconomic variables such as economic growth, inflation rate

and

foreign

direct

investment

is

complex.

Single equation methods, such as the OLS,

will

not

adequately

analyze

these

complex

relationships.

The

simultaneity

of

the

relationships requires an estimation technique that is solved simultaneously in order to

capture the feedback effects. To this end, the behavioural relationships of the model were

estimated using Weighted Two Stage Least Squares (WTSLS) estimation technique.

Apart from eliminating the simultaneity bias, these methods of estimation produce results

that correct for the possible heterogeneity that may arise from the use of cross section in

our

panel

of

WAMZ

countries.

For

robustness,

another

estimation

technique

  • -

    the

General Method of Moments (GMM) - is also used to estimate the relationships.

Annual data running from 1980 to 2002 has been used for the analysis. All the

secondary data for the analysis were sourced from the World Bank Database for Africa

2005

and

World

Development

Indicator

2004.

The

dummy

variable

for

political

instability was constructed from information provided by Goldstone et al (2000)’s State

16

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