Trade Liberalization and FDI: A Cointegration and Causal Analysis for Benin

Abstract

The period following mid-1970s marked the implementation of liberal trade policies by African economies to attract FDI for sustainable economic development. This paper estimates a structural VECM and investigates the long-run effectiveness of trade liberalization as an FDI policy measure for Benin. The Johansen cointegration test identifies significantly positive long-run impact of trade openness on FDI inflows into Benin. Granger causality establishes unidirectional causal link from trade openness to FDI inflows. Based on the cointegration and causal analysis, greater participation in international trade by Benin will expectedly increase FDI inflows into the economy.