Fragility of FDI flows in sub-Saharan Africa region: does the paradox persist?

Abstract

The circumstances of the SSA region regarding the inflow of foreign direct investment (FDI) present a puzzle. In spite of the high rate of return on investment, the inflow of foreign investments keeps eluding the region, and the COVID-19 pandemic even perplexes the flow fragility the more. What factors then determine FDI flows aside from return on investment? Could there be more persuasive relative cost complexes? The study aimed at testing the effects of determining factors that influence FDI flows and their impact on economic development, considering the COVID-19 period. The study used cross-country pooled data from 30 SSA countries collected between 2001 and 2020. The study utilized five panel estimation techniques, namely Pooled Regression, Fixed Effect (FE), Random Effect (RE), Panel Two-Stage Least Square and Differenced Generalized Moments of Method (DGMM). The study found that the inflow of FDI has significant positive impact on economic development in the sub-Saharan African region. It is also ascertained that the outflow of FDI, and political stability has an inverse relationship with economic development. The study recommends that governments of host economies should hence ensure an enabling framework for their economies, so as to improve infrastructure, political stability, and institutional quality, in order to sufficiently encourage the inflow of FDI into the SSA region and make the environment inviting, sustainable, and beneficial for foreign investors and host economies alike.