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

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