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.