Bayesian model averaging approach of the determinants of foreign direct investment in Africa

Abstract

The possibility of misinforming policy direction is undoubtedly high when factors determining foreign direct investment (FDI) are haphazardly selected owing to the diverse nature of the underlying FDI theories, thus leading to model uncertainty. To resolve the econometric and policy concerns, this study re-investigates the determinants of FDI for 53 African economies for which comprehensive data are available using the Bayesian Model Averaging (BMA) technique over the period, 1984–2018. Interestingly, unlike the previously conducted studies on FDI determinants, variables such as gross fixed capital formation, trade openness, exchange rate, secondary school education, democratic regime type and mobile subscriptions per 100 people take preeminent positions over other explanatory variables for the continent. However, government consumption expenditure, inflation, GDP per capita, capital openness and credits to the private sectors constitute the major deterring factors of FDI into the continent. These variables altogether remain the substantive predictors of FDI into African continent out of the 23 explanatory variables used. Similarly, differences are observed in the determinants of FDI across the regions of the continent. Thus, assuming the general policy framework to region specific concerns may not be efficient policy menu to attracting foreign capital flows. In light of the preceding, understanding the salient African-wide determinants as well as each region's idiosyncratic details regarding the determinants hold a promising path to tread in attracting foreign direct investment.