Determinants of Foreign Direct Investment in Africa

Abstract

Despite economic and institutional reform in Africa during the past decade, the flow of Foreign Direct Investment (FDI) to the region continues to be disappointing and uneven. In this study we use the fixed and random effects models to explore whether the stylized determinants of FDI affect FDI flows to Africa in conventional ways. Based on a panel dataset for 29 African countries over the period 1975 to 1999, the paper identifies the following factors as significant for FDI flows to Africa: economic growth, inflation, openness of the economy, international reserves, and natural resource availability. Contrary to conventional wisdom, political rights and infrastructures were found to be unimportant for FDI flows to Africa. The significance of a variable for FDI flows to Africa was found to be dependent on whether country- and time-specific effects are fixed or stochastic.

Foreign Direct Investment, International Trade and Financial Development in BRICS-T Countries: A Bootstrap Panel Causality Analysis

“…This implies that investment is directed to the financially developed markets. This result is consistent with those of Asiedu, 2002;Onyeiwu and Shrestha;2004;Ang, 2008;Mottaleb and Kalirajan; Aside from servicing a gap in the literature, this study provides valuable information for the policy makers dealing with the development of financial markets in emerging economies. It is highly recommended for future studies to examine financial development with the inclusion of additional macroeconomic variables.…”

“…Various studies find that international trade promotes inward FDI flows in host countries (Asiedu, 2002;Onyeiwu & Shrestha;2004;Ang, 2008;Mottaleb & Kalirajan;. However, it is also found that international trade restrains the volume of inward FDI flows (Wheeler & Mody, 1992;Brainard, 1997).…”

The Determinants of Foreign Direct Investment in the African Union

“…After examining 29 countries in Africa, [14] find infrastructure insignificant in influencing FDI flows. These researchers find that poor infrastructure may not deter foreign investors because factors such as natural resources, openness to trade, and other macroeconomic variables may be more significant.…”

“…Fifty three African countries were examined by [10] who concludes that natural resource endowments (especially oil) attract substantial FDI 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].…”

Institutions and Foreign Direct Investment: Evidence from Sub-Saharan Africa Regions

“…On the other hand, a recent study by Kim (2010) documents evidence in support of the argument that countries with high level of corruption of government and low level of democracy have higher FDI inflows while being lower for those with greater political rights. Still others such as Onyeiwu and Hemanta (2004) find no significant relationship between the quality of institutions and inward FDI.…”