Financial globalization and institutions in Africa: the case of foreign direct investment, central bank independence and political institutions

Abstract

In this paper, we examine the bi-directional relationship between financial globalization (proxied by foreign direct investment (FDI) flows) and economic institutions (proxied by central bank independence (CBI)) taking into consideration the role of political institutions. We test our argument on a sample of 48 African countries (1970–2012) using a two-step System Generalized Methods of Moments, with collapsed instruments and Windmeijer robust standard errors. Using two proxies for CBI, the study finds that while legal CBI does not have a significant impact on FDI, high central bank governor turnover rates have a significantly negative impact on FDI inflows. However, higher levels of political institutions significantly enhance the impact of legal CBI on FDI inflows, and dampen the impact of high central bank governor turnover rates on FDI inflows. The study also shows that, higher FDI inflows have a significantly positive impact on both legal and de facto CBI. This impact is accelerated in countries characterized by higher levels of political institutions.

Does central bank independence matter for the location choices of Chinese firms’ foreign investments?

“…In column (1), the CBI variable is the only explanatory variable. The coefficient of CBI is significantly negative at 1%, indicating that Chinese enterprises are more likely to invest in countries with a low level of CBI, which is not in line with the findings of Agoba et al (2020) and Bodea and Hicks (2015). Next, we add several control variables.…”

“…Using data of 78 countries over the 1974-2007 period, Bodea and Hicks (2015) find that a high level of CBI in the host country attracts OFDI inflows but does so only in non-OECD democracies where the political institutions are credible. Using data for 48 African countries over the 1970-2012 period, Agoba et al (2020) conclude that a high level of CBI leads to higher OFDI inflows.…”

“…One dimension of institutional quality is central bank independence (CBI), i.e., the extent to which the influence of politicians on monetary policy making is constrained (de Haan et al, 2018). Only two papers have analyzed the role of CBI in attracting foreign direct investment (Agoba et al, 2020;Bodea and Hicks, 2015). These studies conclude that a high level of CBI leads to higher OFDI inflows as CBI may increase the credibility of monetary policy, promote price stability, and signal policy and institutional stability.…”

Location choice and Indian outward foreign direct investment: institutional thresholds and differentiating between institutional quality and institutional distance

“…Increasing calls have been made for institutional research to better distinguish between the effects of institutional profiles (institutional quality) versus institutional distance on foreign direct investment (FDI) flows (Cuervo-Cazurra et al ., 2019; van Hoorn and Maseland, 2016). Whilst it is intuitive that locations with good institutions would be more attractive to foreign investment (Agoba et al ., 2020; Luo et al ., 2019; Meyer and Peng, 2016), empirical evidence has shown mixed results (Bailey, 2018; Bessonova and Gonchar, 2015; Buckley et al ., 2018). Likewise, when it comes to institutional distance, some studies have maintained that FDI flows are deterred by institutional distance (Cezar and Escobar, 2015; Zhou and Guillen, 2016), and others that they are likely to go to institutionally distant locations (Kang and Jiang, 2012; Pisani and Ricart, 2018).…”

Currency regimes and external competitiveness: the role of institutions, trade agreements and monetary frameworks

“…Recent literature argues that structural changes such as institutional arrangements play a crucial role in both growth (see Mullings, 2020) and attracting capital inflows (see for example Bournakis et al, 2018, Agoba et al, 2020. Those inflows in the presence of better institutional quality contribute to the capital stock in those countries (see Nemlioglu and Mallick, 2020;Younas, 2009) as well as their international reserves (see Aizenman et al, 2015), which in turn may contribute to controlling the misalignments in the REER.…”