Institutions and Foreign Direct Investment Flows in Sub-Saharan Africa

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In many developing economies including Sub-Saharan African countries characterized by low per capita real income, high population growth rate, high rates of unemployment, dependence on the primary sector, dependence on exports of primary commodities, and a high level of poverty, and also a low level of domestic investment. By then savings-investment gap occurs. Those problems are unacceptable and have to change. To increase GDP growth, saving, and investment; these countries needed Foreign Direct Investment (FDI) as a significant source of capital inflows to fill the gap to sustain economic growth. Hence, this study aimed at identifying the effect of institutions on foreign direct investment for Sub-Saharan African countries. To do so it used the panel data collected from database of World Governance indicators and Development indicators of 21(twenty-one) selected sample countries of the region observed from year 2002-2019. It used descriptive statistics and econometric analysis techniques. It employed the dynamic panel model of System GMM estimator of Arellano and Bover (1995) and Blundell and Bond (1998) for econometrics analysis part. The study found that institutions are one of the key factors of foreign direct investment in the host countries. Among the key basic institutional factors: from governance indicators such as governance effectiveness, control of corruption and regulatory quality, and in case of the control variables: market size, infrastructural condition, resources availability, macroeconomic stability, and openness indicators have been explored their effects on FDI flows to the region. Governance effectiveness, control of corruption, GDP per capita, population, infrastructure (telephone subscription), access to electricity, and skilled labor force (school enrolment) are key fundamental factors and have good potential to attract foreign direct investment flow to the host countries in the SSA region. Key Words: Sub-Saharan Africa, Foreign Direct Investment, Institution, Governance Effectiveness, Control of Corruption, Regulatory Quality



Foreign Direct Investment, Institution