Trade Openness, Foreign Direct Investment and Growth: Evidence from Ecowas Countries

Abstract

This study examines trade openness, foreign direct investment and growth in the Economic Community of West African States (ECOWAS) using data from 1990 to 2024 which was estimated with a Panel Error Correction Model (ECM) and a Panel ARDL framework as a robustness check. The analysis incorporates trade openness, foreign direct investment (FDI), and the exchange rate as key explanatory variables for GDP. The findings show strong evidence of a long-run cointegrating relationship among the variables, confirmed by a highly significant and negative error-correction term, indicating that deviations from equilibrium are corrected each period. Across both models, FDI emerges as the only variable with a statistically significant and positive impact on GDP in the short and long run, underscoring its central role in stimulating economic growth. In contrast, trade openness and exchange-rate movements show no significant influence on GDP, suggesting that their benefits remain constrained by structural bottlenecks within the region. The study therefore recommends that policy makers in ECOWAS Countries should strengthen regional investment climate to attract productive FDI by harmonising investment regulations across ECOWAS to reduce investor uncertainty and make the region function like a single investment destination, deepen implementation of the ECOWAS Common Investment Market (ECIM) to attract large-scale manufacturing, agro-processing, and energy investments and reorient trade openness toward value addition and regional production. Since trade openness is insignificant for growth, ECOWAS must shift focus from opening markets to building productive capacity by promoting regional value chains in agriculture (cocoa, cashew, shea, rice), manufacturing (pharmaceuticals, textiles), and services (finance, ICT). Finally, it must reduce non-tariff barriers (NTBs) at borders, especially delays, extortion, and lack of harmonized standards.