Does institutional quality matter in foreign direct investment?: Evidence from Sub-Saharan African countries

Abstract

Using fixed effects estimation techniques, this study seeks to explain the impact of institutional quality on foreign direct investment (FDI) inflows to 45 SSA countries over the period 1996-2007. Our results show that there is no statistically significant relationship between institutional quality and FDI inflows to SSA countries. Thus, this study contradicts previous studies that have found a statistically significant association between institutional quality and FDI inflow to African countries. These results do not come as a surprise given that many SSA countries score very low on all dimensions of institutional quality. However, these findings should be interpreted very cautiously as they do not discount the importance of institutional quality in the sustainable development process of SSA. Accordingly, it is plausible that institutional quality may affect FDI indirectly by stimulating other variables, including human capital, infrastructure, and health of workers - which in turn directly affect FDI. There is also overwhelming evidence that show that a host country's natural resource endowment significantly influences FDI inflows.