FACTORS INFLUENCING FOREIGN DIRECT INVESTMENT INFLOW IN SOMALIA

Purposes: The last four decades, the value of foreign direct investment (FDI) inflow in Somalia has fluctuated between $339,000,000 in 2016 and $43,390,000 in 1970. Thus, this research investigated the factors influencing foreign direct investment (FDI) inflows in Somalia. Over the period from 1980-2017 and data are obtained from the World Bank.

Design/ Methodology/ approach: this study used The Vector Auto regression (VAR) model. The econometric methodology to be utilized includes the unit root test for used Augmented Dickey-Fuller (ADF), co-integration test, Johansen integration test and diagnostic test includes serial correlation, normality, heteroskedasticity and AR root test. Furthermore, they are also utilized for VAR Granger causality tests.

Findings: The findings of this paper indicated unit root test showed that all variables except external debt are not stationary at the level but become stationary after first differencing at the 10% level of significant. The co-integration test indicates the relationships between variables are integrated. The Granger-causality test shows only one-way Granger-causality relationships from FDI to GDP, import and export variables or so-called unidirectional Granger causality. Moreover, impulse response function indicates results all variables are positive related in the short run and long run except for imports which is negative related with FDI. Although, GDP, imports and inflation are significant to FDI, but export and external debt are insignificant to FDI. Therefore, this research concludes that FDI influences economic growth in Somalia.

Research limitations/ implications: Although this research has expended and evolved prior studied various respects, a comprehensive and systematic time-series study on FDI and its determinants in Somalia would involve more capitals than had been made available for this study. There are still a number of specific constrains to be noted on the investigating FDI and its determinants in this paper, some factors such as political and macroeconomic instability, human capital, infrastructure and corruptions are not considered owing to data availability. Moreover, it’s recommended that future studies could improvement widely and update research in FDI.