Investment Uncertainties and Economic Growth in Sub-Saharan Africa

Abstract

Abstract This study investigated the effect of uncertainties, segmented into macroeconomic and political components, on investment in sub-Saharan Africa, with thirty-one countries represented. The analyses were further nuanced to trace the investment-growth link within this set of countries. Two investment types—private and foreign direct—were covered in separate analyses. The sample of countries was chosen through stratified sampling to include oil-exporting, other resource-intensive, and nonresource-endowed countries. The Jorgenson investment model, which explicitly incorporates uncertainty into the investment decision-making process using adaptive and extrapolative approaches, was adopted for the study, and augmented with the partial adjustment model to address the assumption that the user cost of capital adjusts instantaneously. For the two investment types considered, the impartial contract and foreign investment model and the country risk and private investment model were adopted, respectively. The two-way system generalized method of moments technique was employed for estimation. The results showed that foreign direct investment (FDI) in oil-exporting and other resource-intensive countries was only sensitive to macroeconomic uncertainty, while FDI in nonresource-intensive countries was vulnerable to both macroeconomic and political uncertainties. This finding strengthens the belief that, regardless of political instability, natural resources are a major attraction for foreign investors in sub-Saharan Africa. Finally, the study revealed that private investment in the resource-intensive region was primarily affected by macroeconomic uncertainty, whereas its political vulnerability was mainly observed in the oil-exporting and nonresource-intensive regions. To mitigate investment uncertainties in sub-Saharan Africa, it is crucial to focus on minimizing the volatility of interconnected price variables, requiring collaborative efforts.