Foreign direct investment inflows and unemployment dynamics in Africa

Abstract Purpose The study explores the nexus between foreign direct investment and both total and youth unemployment in 43 African countries spanning from 1990 to 2021. It investigated how trade openness, economic growth, domestic investment, and inflation mediate this relationship. Design/methodology/approach Used panel data with the aid of the Generalized Methods of Moment (GMM) regression estimator to address potential endogeneity and unobserved heterogeneity. Separate specifications were estimated for total and youth unemployment and for models, where FDI is proxied by domestic investment. Findings The empirical results demonstrate a negative and statistically significant effect of FDI on both total and youth unemployment in Africa, although the baseline simple correlations are weak. When domestic investment is analyzed, it exhibits a nuanced impact, generally discouraging youth unemployment but showing mixed effects on total unemployment depending on macroeconomic conditions. Trade openness and economic growth serve as critical mediating factors, enhancing the employment-generating capacity of FDI. Robust GMM diagnostics confirm the validity of the instruments and the absence of second-order serial correlation. Originality This research advances the theoretical and empirical literature on the African labor market by conjointly modeling total and youth unemployment over an extensive 31-year period. It strengthens the theoretical framework by integrating labor demand theory with FDI spillover effects, and it rigorously addresses key econometric challenges, including instrument proliferation and serial correlation, thereby enhancing the reliability and policy relevance of the findings.