Although presented as essential catalysts for economic development, the actual effects of foreign direct investment on host economies sometimes remain ambiguous and context-dependent. This study examines the impact of foreign direct investment (FDI) on domestic investment within West African nations, using a panel of 14 countries over the period from 2000 to 2019. The analysis employs the autoregressive distributed lag (ARDL) model in error correction form, estimated using the pooled mean group (PMG) method. The findings suggest that, in the long term, FDI has a crowding-out effect on domestic investment in West Africa, whereas in the short term, it has a temporary leverage effect. Furthermore, the study reveals that the return to equilibrium of domestic investment, following a short-term deviation, is slow and gradual.
In light of these findings, it is recommended that the governments of the region implement safety nets to regulate incoming FDI. Additionally, ensuring that the objectives of companies receiving FDI extend beyond mere profit maximisation to include the promotion of sustainable development within the host countries is crucial.
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