Patterns of Trade and Foreign Direct Investment in Africa : A simple test of the new trade theory with multinationals

Abstract

In this study, we present an empirical survey of the patterns of trade and FDI in Africa based on a sample of 28 countries and their transactions with the OECD countries. These patterns are used to test whether the predictions of the new trade theory with multinationals as described by Markusen and Venables (1995,1998) fit the development in Africa. The theory states that multinational production will gradually outgrow trade as countries converge in terms of income, yet our econometric study gives only week evidence supporting such a pattern. Alternative explanations are also investigated,and it is shown that trade barriers, geographical distance, income per capita and access to ocean explain much of the variation in trade and FDI in Africa.