Macroeconomic and institutional conditions: the drivers behind divestment of FDI in Sub-Saharan Africa

Abstract

PurposeThe purpose of this paper is to determine how macroeconomic performance work with institutional quality influences divestment of foreign direct investment (FDI) in Sub-Saharan Africa, in the short and long run.Design/methodology/approachThis paper investigates divestment of FDI in Sub-Saharan Africa, within the period 1980–2020. The investigation is undertaken by first comparing the trend with what is obtained in other economic regions of the world. The factors behind the divestment are subsequently investigated, using the vector error-correction model.FindingsIn the comparative analysis, Sub-Saharan Africa and other regions are observed to have witnessed sustained divestment in recent years. The estimation results of the model reveal that macroeconomic performance and institutional quality are the predominant drivers behind the divestment.Research limitations/implicationsThe findings, however, do not conform to the neoclassical theory that lays emphasis on investment return as the fundamental factor influencing investment. Long-run structural stability is also established; hence, the results may be considered suitable for predicting future divestment in the region.Practical implicationsIn view of the empirical findings, macroeconomic performance and institutional quality need to be improved to ameliorate FDI divestment in Sub-Saharan Africa.Originality/valueThere is paucity of research works on divestment of FDI in Sub-Saharan Africa. Again, there is paucity of works on how macroeconomic and institutional conditions work together to influence divestment. This study provides some evidence to bridge the perceived gaps.