Growth Effects of Foreign Direct Investment (FDI) From China and Other Sources in Africa: The Role of Institutional Quality

Abstract

This study examines the effects of Foreign Direct Investment (FDI) from China, United States (US), European Union (EU) and the rest of Asia on economic growth conditional on the institutional quality of sub-Sahara Africa for the period (2003-2012). We develop theoretical argument from the existing literature to show that institutional heterogeneity may be one of the description for mixed findings of previous empirical studies on the growth effects of Chinese FDI in Africa. We use rule of law to proxy for institutional quality. Using Panel Threshold Regression (PTR) model, we show that FDI from all these sources have a positive impact on growth only above certain thresholds of rule of law and these thresholds differ from one source to the other. However, for FDI from China and the rest of Asia, the difference is marginal. That is, the growth effect of FDI from Asia is positive in countries with governance rating of at least -0.89 while negative in countries falling within a range of -1.35 and -0.89. In terms of FDI from EU and US, beneficial outcomes on growth are realized in countries with governance rating of at least -0.90 and -0.62, respectively. These results confirm that China and the rest of Asia do invest in both weak and strong governance countries in sub-Sahara Africa although the impact is different. Whereas, US and EU seem to invest only in strong governance African countries. However, the former is more sensitive to institutional quality than the latter.