Foreign direct investment and environmental sustainability in Africa: The role of institutions and governance

Abstract

The African continent continues to explore more avenues to increasing its share of the global FDI inflows. In the midst of all these, very little has been said about how FDI among others contribute to the environmental degradation of the continent. Literature is sparse when it comes to how eco-unfriendly FDI flows could be, albeit it’s economic growth prowess. In this very study, we employ the use of a 24 year panel data (1990–2013) across Africa to investigate the impact of FDI inflows on the eco-system in order to situate Africa’s FDI flows within the sustainability development agenda popularized in the 80s. For the first time, we investigate how governance and institutions may regulate the impact of FDI on environmental sustainability. We do this conscious of the fact that other factors could also impact negatively on Africa’s eco-system which we control for in the empirical model. The empirical results compositely reveal an increase in FDI inflows significantly increases environmental degradation; hence causing a negative impact on sustainability of the environment. Year dummies indicate that environmental degradation in the post 2010 era is greater than degradation in 1990 which was used as the reference point. The study affirmed that, for FDI to have a positive impact on environmental sustainability, there need to be strong governance and quality institutions in place to check the conduct of businesses financed through the FDI flows. The study provides empirical evidence to anchor governance and institutional policy prescriptions towards reducing the negative impact of FDI flows on environmental sustainability within the sustainable development preposition.