Determinants of Foreign Direct Investment: A Comparative Study between Central and East Africa

Abstract

In the recent decades, East African region has been attracting more inflows of Foreign Direct Investment (FDI) than Central Africa, while the trend was different for the period before 1990. This study aimed at identifying factors that determine FDI attraction in the two regions using a panel data of six countries (three in Central Africa and other three in East Africa) over the year 1990-2018. We applied the Panel Autoregressive Distributed Lag (P-ARDL) model based on the Pooled Mean Group (PMG) estimation to capture short and long-run relationships amongst variables. Results indicated that in the long-run, infrastructure quality, trade openness and market size explain the attraction of FDI inflows in both Central and East Africa. A comparison of the two regions shows a sharp contrast of factors that attract FDI. While trade openness and natural resources endowment are key factors for Central Africa, infrastructure quality and market size are critical in East Africa. However, resource curse hypothesis has been found in Central Africa since the increase in resource rents decreases the attraction of FDI inflows. Therefore, policies which promote cooperation among countries by increasing the levels of trade, reduce the costs of doing business and invest in infrastructures should be implemented in the two regions.

Outward looking foreign direct investment and its determinants in highly indebted Eastern African countries

“…Potential markets can improve the elastic investor’s opportunity to maximize their economic scale. The study was consistent with [ 10 , 37 , 45 , 46 , 48 , 50 , 51 , 53 , 63 – 65 , 76 ]. Furthermore, the study supports market imperfection theory, arguing that as a result of market imperfection, multinational corporations might base their businesses or manufacturing operations in these nations to capitalize on economies of scale [ 29 ] and the market size hypothesis [ 42 ] stressed that developed western foreign investors usually target an economy with large market.…”

“…The long-run association in Rwanda is supported by the location advantage of FDI, which states that low labor costs plays a prominent role in attracting FDI. The study’s findings are in line with those of [ 25 , 44 , 46 , 65 ],who all came to the same conclusion that cheap labor does not significantly contribute to attracting FDI because foreign investors are primarily focused on labor productivity [ 44 ]. The study also supports resource-seeking (vertical) or export-oriented FDI, which invests in foreign nations to acquire resources such as raw materials, labor, and natural resources.…”

“…In most studies, GDP growth per capita is preferred as an indicator of market growth. Furthermore, market size is identified as a critical determinant of FDI in East Africa [ 65 , 66 ].…”

“…Consequently, investors face high production costs in regard to processing these raw materials. This situation acts as a deterrent to foreign direct investment (FDI) inflow [ 65 ]. Natural resources provide an absolute advantage to a country because their abundance is often associated with factors of production.…”

Foreign Direct Investment in Less Developed Countries: Do Institutions Still Matter? Evidence for Central African Countries

“…In the same way, we can mention civil liberties as determinant of institutions in promoting economic growth (Kormendi & Meguire, 1985;Levine & Renelt, 1992). Bahati & Mbithi (2022) comparing Central and East Africa flows of FDI arrives at a diversity of determinants and specificities Property rights also analyzed as part of institutions indicators (Pejovitch, Furubotn, Keefer and al.). The evidence of Economic freedom-growth and Democracy-growth is also discussed but their effects are no more evident (Malesky, 2008;Morrison, 2009).…”