Major Determinants of Foreign Direct Investment in the West African Economic and Monetary Region

Abstract

The main concern of this paper is to answer the question of the determinants of FDI inflows to West African Economic and Monetary Union (WAEMU). The literature on FDI recognizes not only the existence of gaps between domestic savings and investment in most developing countries but also that FDI constitutes a cure capable to bring the latest technology and management know-how into these countries. The aim of this paper is to find the macroeconomic determinants of FDI in WAEMU (constituted of 8 countries namely: Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo). To this end, an econometric model based on panel cointegration analysis for the period 1980-2010 was estimated. The results show that countries with high potential market size (GDP per capita), large trade openness and with more business friendly environment (low political risk) attract more FDI. The findings further show that: (i) infrastructure development is one of the most important determinants that attract FDI to the region; alongside the human capital, financial development, macroeconomic stability, exchange rate and political stability; (ii) not all the variables affect FDI the same way in the WAEMU region; (iii) there is a positive relationship between FDI and economic growth which implies that FDI stimulates economic growth; (iv) this study finds a positive relationship between FDI and macroeconomic stability (inflation) in WAEMU; (v) financial development needs to be improved to enable more gain from FDI. This suggests that the impact of FDI can be enhanced through financial development under a good environment that has to be provided in WAEMU.