Foreign Direct Investment and Economic Growth in Africa: New Empirical Approach on the Role of Institutional Development

Abstract

ABSTRACT According to the predominant conclusion from the recent FDI-growth literature, the conflicting evidence concerning the effect of foreign direct investment on economic growth in host countries might be due to the fact that the gains from FDI are conditional on certain domestic factors. Among these factors is the quality of institutions. The aim of this study is therefore to investigate the role of institutional development in FDI-growth nexus in African countries. Using a panel smooth transition regression model with a sample made up of 27 African countries over the period 1990–2017, the results show that FDI promotes economic growth in countries where the level of institutional development is beyond a certain threshold. In countries that fall below the threshold, FDI has either a negative or null effect on economic growth. Specifically, we find that countries should be above the 65% threshold regarding government stability score, 55% for investment profile, 50% for democratic accountability, 45% for law and order, 35% for corruption, and above the 25% threshold for bureaucracy quality score to benefit from FDI in terms of economic growth.