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The inability of most trade policy reforms and liberalization in developing

countries to attract enough FDI has prompted a large body of research on the determinant

of FDI flows to developing countries. An extensive literature based generally on three

approaches-aggregate econometric analyses, survey appraisal of foreign investors’

opinion, and econometric study at the industry level- has failed to arrive at a consensus

on the determinants of FDI flows. For developing countries, the overall empirical

evidence seems to suggest that although FDI may affect growth, growth itself is also a

crucial determinant of FDI.1

It becomes natural therefore to ask: will developing

countries grow as a result of the contribution of FDI or should they grow first and by this

means attract FDI? What essentially determine FDI flows, and the impact of FDI on

macroeconomic performance of WAMZ countries? This article addresses these issues

using a simultaneous-equations model on a panel of WAMZ countries over the period

1980 to 2002. We find no evidence of a two-way causal relationship between FDI flows

and economic growth. Rather FDI tends to be attracted by high per capita income,

economic growth, better infrastructure and political stability. Economic growth, on the

other, seems to increase with greater trade openness rather than foreign direct investment

inflows.

The article is organized in five sections. The following section reviews the

theoretical and empirical literature. The analysis is in section 3. Section 4 discusses the

major policy lessons while section 5 concludes.

1 Graham (1995) reviews the theoretical and empirical literature on the determinants of FDI and the economic consequences for both host and source countries.

3

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