Foreign Direct Investment in Sub-Saharan Africa: The Role of Institutional Quality, Macro Economic Uncertainty, and Political Risk
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Date
2023-06-01
Authors
Yoseph Biadigilign
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Publisher
A.A.U.
Abstract
A surge of foreign direct investment (FDI) to the developing world has been observed in recent years. However, Sub-Saharan Africa (SSA) has received less investment compared to other regions on par. This study attempts to examine the roles of institutional quality, political risk, and macroeconomic uncertainty in intimidating the inflows of FDI to Sub-Saharan Africa (SSA). The study applied the panel fixed effect and Dynamic GMM (Arellano-Bond) models for 26 sample countries in SSA, over the period from 2002 to 2021. The findings of the study show that regulatory quality, Control of corruption and enforcement of rule of law promotes the inflow of FDI to SSA. Less Political risk as proxied by political stability and absence of violence/terrorism, and government effectiveness reveals a significant positive effect on FDI inflows, while voice and accountability found to have insignificant effect on FDI inflows to the region. Macroeconomic uncertainties as proxied by real effective exchange rate and inflation rates negatively influenced the inflow of FDI to SSA. Other control variables included in the model, such as openness to trade and rate of return on investment also have positive effect on FDI inflows to the region, whereas labor force and infrastructure availability are insignificant in influencing FDI to SSA. Thus, improving institutional quality, mitigating political risks, and managing macroeconomic variables such as inflation and exchange rates are critical policy implications for attracting more FDI inflows to SSA countries.
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Keywords
FDI, Institutional Quality, Political Risk, Macroeconomic Uncertainties, SSA