Foreign direct investment, regulations and growth in sub-Saharan Africa

Abstract

This paper examines the effect of foreign direct investment (FDI) on economic growth and determines how the regulatory regime of the countries affects the FDI-growth relationship for 22 sub-Saharan African countries for the period 1980–2011. Using General Methods of Moments (GMM) estimation technique, the findings of the study show that both FDI and regulations (total regulations, credit market regulations, business regulations and labor market regulations) do not have an independent significant effect, however, their interaction has a significant positive effect on economic growth. This implies that the growth effect of FDI is stimulated in the presence of effective and quality regulations. Therefore measures have to be put in place to strengthen regulations in sub-Saharan Africa in order to realize the benefits of FDI.