FDI Flows to Sub-Saharan Africa: The Impact of Finance, Institutions, and Natural Resource Endowment

Abstract

Using a panel data from 38 Sub-Sahara African (SSA) countries and a dynamic system GMM model, this study examines the individual and interactive impact of financial development, institutional quality, and natural resource endowment on both the stock and the flow of inward foreign direct investment (FDI) to the region. It finds that inward FDI is more dynamic in non-resource-rich than in resource-rich countries; that in non-resource-rich countries, foreign investors rely more on the efficiency of the governance institutions, but in resource-rich countries, the formal financial system provides alternative platform for managing the stock of existing FDI, as well as for providing financial allocative and intermediation roles; that the impact of natural resource endowment and macroeconomic factors are more robust in the stock than it is in the flow of inward FDI; that the capacity of an SSA country's financial system to attract and support foreign investments is dependent on the quality of her telecommunication infrastructure, the quality of legal and governance structures, and the kind of FDI in question; that the positive impact of infrastructure on FDI depends on the size of a country's market; and that although natural resource endowment appears to be key source of inward FDI to SSA countries, its importance has diminished since the start of 2000.