Asymmetric effects of foreign direct investment and trade openness on economic growth in Somalia: Evidence from a non-linear ARDL approach

Abstract

Globally, the spread of economic integration and the lowering of trade protectionism through multiple trade pacts offered the products of many developing nations the chance to access global markets. The international economics literature deeply discusses the influence of trade liberalization and foreign investment on economic expansion; however, most assume a symmetric association. It is crucial to evaluate the nonlinear connection, as reliance on linear models might produce biased results. Accordingly, this study explored the asymmetric effects of trade openness and FDI inflows on the economic growth of Somalia using yearly data from 1990 to 2020. The outcomes of the non-linear autoregressive distributed lag (NARDL) suggest that both an increase and decrease in FDI strengthen the economic expansion of Somalia in the short-run and long-run. The domestic investment role in stimulating national output was also considerable. Moreover, the study outlined that a decline in trade openness shrinks growth in the long-run. Besides, we observed from the vector error correction modeling (VECM) a one-way causal linkage from labor force, capital, FDI, and trade openness to GDP in the short-run but not in the long-run. Moreover, short-run unidirectional causation from GDP, trade openness, labor force, and capital to FDI is observed. According to the outcomes, the study proposes that policymakers intensify trade liberalization, encourage local investment, and channel foreign investment toward export-oriented industries.