Differential Impacts of Economic Volatility and Governance on Manufacturing and Non-Manufacturing Foreign Direct Investments: The Case of US Multinationals in Africa

Abstract

The focus of this study is to examine the differential impacts of economic volatility and governance on the flows of US manufacturing and non-manufacturing foreign direct investment (FDI) into African economies. A Generalized Autoregressive Heteroscedastic (GARCH) model is used to generate economic volatility indicators for each sample country. Different governance indices have also been used to test the robustness of the findings. The results of the study show that the influence of economic volatility and governance on aggregate US FDI is weak. For the flows of US manufacturing FDI, effects of economic volatility are undetectable; for this sub-sector, investor confidence, government policy commitment, and availability of labor stand out as major determinants. For US non-manufacturing FDI, however, both economic volatilities and governance have significant effects, although only when economic volatilities occur together with bad governance and high debt burden. Other economic factors, such as trade links between host countries and the US, and between host countries and the rest of the world, also boost the flows of both manufacturing and non-manufacturing US FDI in African economies.