Foreign direct investment inflows impact on household per capita income: A comparative analysis of emerging economies’ regulation

Abstract

This study examines the impact of foreign direct investment (FDI) inflows on household per capita income in Nigeria and South Africa, two of Africa’s largest emerging economies, using annual data from 1980 to 2020. The autoregressive distributed lag (ARDL) bounds testing approach is employed alongside pooled mean group (PMG), mean group (MG), and dynamic fixed effects estimators to examine long-run and short-run dynamics. Pedroni (2004) and Kao (1999) cointegration tests confirm a long-run relationship between FDI inflows and household per capita income in the panel. The PMG estimator, selected by the Hausman test, shows a significant positive long-run relationship, consistent with endogenous growth theory. Short-run error correction terms (ECTs) are negative and significant, confirming adjustment to equilibrium. Exchange rate depreciation and inflation exert negative effects on household per capita income. These findings carry direct policy relevance: African governments should prioritise investment climate reforms and complementary human capital policies to ensure FDI translates into measurable household welfare gains rather than remaining in enclave sectors.