Institutional Quality and Inward Foreign Direct Investment in Sub-Saharan Africa
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Date
2025-01-11
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A.A.U
Abstract
This study aimed to investigate the impacts of institutional quality on foreign direct investment
(FDI) in Sub-Saharan Africa, focusing on identifying key economic challenges and opportunities
to inform strategic policy interventions. The research problem stems from persistent socioeconomic vulnerabilities in African economies, including weak institutional frameworks and their
impacts on capital flows or FDI which is key for technology transfer, economic diversification and
economic growth in the region. Employing a quantitative research design and a deductive
research approach, the study analyzed secondary data collected from reputable global financial
and economic databases. A purposive sampling technique was used to select countries based on
economic diversity, regional representation, and data availability. Data analysis involved
descriptive and inferential statistical methods to ensure robust and reliable findings. Using panel
data for selected SSA countries for the period from 2000 to 2003 and employing generalized
method of moments (GMM) and quantile regressions, the study provides evidence that the quality
of governance is a critical determinant of inward FDI in SSA. The key findings revealed that the
performance of inward FDI is significantly influenced by the quality of governance, including
Control of Corruption, Rule of Law, Voice and Accountability, Government Effectiveness,
Political Stability and Absence of Violence/Terrorism and Regulatory Quality. The analysis
reveals a great extent of heterogeneity. Countries with lower levels of FDI benefit most from
improvements in the quality of governance. The study concludes that tailored interventions,
including strengthening institutional frameworks and the quality of governance are crucial for
enhancing the inflow of foreign direct investment which is crucial for economic growth and
resilience in Africa. The findings have important policy implications. Improving the quality of
governance and institutional quality is crucial for African countries in order to facilitate inward
FDI to the region. Policy reforms, capacity building, and stakeholder engagement to address
unique challenges regarding the issue of governance is a game changer. This study contributes to
the discourse on sustainable economic development in Africa, providing a roadmap for
policymakers, development partners, and private sector actors on improving various aspects of
governance that are key for enhancing FDI inflows.
Keywords: Quality of Governance, Foreign Direct Investment, Economic Resilience, African
Economies, Institutional Quality, Policy Interventions