Demand Side Factors Affecting the Inflow of Foreign Direct Investment to African Countries: Does Capital Market Matter?

Abstract

This paper aims at providing empirical analysis of the demand side determinants of the inflow of Foreign Direct Investment to African nations, with particular emphasis on stock market availability. Due to data heterogeneity, non-continuity and because the Hausman test favors it, cross section fixed effect Least Square Dummy Variable (LSDV) estimation technique is used. Natural resource, labor quality, trade openness, market accession and infrastructure condition are found to have positive and significant effect. Availability of stock market has the expected positive but insignificant effect. In search of possible explanation governments' expenditure and private domestic investment are added to the regression equation and are found to have positive effect, ruling out the possibility of crowding out effect. Stock markets in Africa are not structured in such a way that they can contribute to attract FDI and hence policy makers should restructure capital markets to get the most out of them. The bottom line is, policy makers of those countries have a lot of demand side instruments under their discretion to attract FDI inflow.

Foreign Direct Investment: A Journey To Economic Growth In Ghana - Empirical Evidence

“…Aseidu (2002Aseidu ( , 2006, for example, reports that the availability of natural resources has a positive and significant effect on FDI inflows. Hailu (2010) conducts an empirical analysis of the demand side determinants of the inflow of FDI to African nations and concludes that natural resources, trade openness and infrastructure condition positively and significantly affect FDI inflows.…”

The Determinants of Foreign Direct Investment in the African Union

“…When the actual inflation rate turns out to be very different from the anticipated inflation rate, foreign firms may lose out as their purchasing power decreases. A high rate of inflation is found to have a negative effect on attracting inward FDI by [15]. Reference [21] also finds the inflation rate to have a negative relationship with FDI flows into Africa.…”

“…Reference [14] examined the determinants of FDI into Africa and find natural resource availability to be significant in influencing FDI inflows. Natural resources are also found to be a significant factor in influencing FDI inflows into African nations by [15]. Reference [13] concludes that natural resources are an important determinant of FDI flows into MENA countries.…”

“…Their results state that further trade liberalization is likely to increase FDI flows into service sectors such as telecommunications, banking, finance, insurance, transport, retail, business, and legal services. References [9], [14], [15], and [20] find that trade openness plays a significant role in attracting more FDI flows into Africa. However, it is important for a host nation to be prudent when making their decision to allow foreign investment.…”

Recommendations on Enhancement of Ghana’s Investment Attractiveness

“…When there is low de velopment, corruption and low transparency are found to hinder FDI inflows Voyer and Beamish (2004) endorsed. Bribery, fraud and extortion are materials that discourage economic growth [2].…”