Abstract
Studies have been conducted on the determinants of foreign direct investment (FDI) destinations. However, there seem to be few studies on determinants in African countries. This paper evaluates the determinants of FDI inflows, by examining specific relationships between the determinants (policy and non-policy factors) and FDI inflows to Africa, using a panel dataset from 1980 to 2016. Ordinary Least Squares (OLS) and Generalized Method of Moments (GMM) were used as the estimation techniques. The dependent variable, FDI inflows, was represented by the ratio of FDI flows to GDP, while the independent variables were agglomeration effects, trade openness, fiscal balance-macroeconomic condition, market size, economic instability, exchange rate, foreign aid, human capital development, corporate tax, and natural resource endowment. First-year lag of FDI (agglomeration effects), trade openness, market size, economic instability, foreign aid, human capital development, and natural resources (oil and metals) endowment have positive and significant effects on FDI inflows to Africa, while there is a negative relationship between FDI inflows to the continent and fiscal balance (public debt), exchange rate, and corporate tax. Consequently, government policies and non-policy factors played significant roles in facilitating FDI inflow into Africa during the study period. The p-value of the estimation (0.0001) further attests to the statistical significance of the results. Consequently, African countries must improve their regulatory framework to be able to attract more inflow of FDI. Efforts should also be made to reform and improve macroeconomic policies, institutional quality, and natural comparative advantages.
Highlights
Foreign Direct Investment (FDI), as a form of capital obtained through foreign sources, has preferred multifaceted characteristics compared to other sources of capital (El-Wassal, 2012; Anyanwu & Yameogo, 2015)
The data used in this analysis was generated from World Trade Organization (WTO) database, the World Bank African Development Indicators (ADI), United Nations Commodity Trade Statistics (UNCTS) Database, International Monetary Fund (IMF), United Nations Statistics Database (UNdata), World development indicators ONLINE, and UN Statistics Database (UNdata)
The Generalized Method of Moments (GMM) estimators used were based on differencing regressions to control for unobserved effects and the utilization of previous explanatory and laggeddependent variables as instruments (El-Wassal, 2012)
Summary
Foreign Direct Investment (FDI), as a form of capital obtained through foreign sources, has preferred multifaceted characteristics compared to other sources of capital (El-Wassal, 2012; Anyanwu & Yameogo, 2015). As an important element in the economic development process, FDI has become the largest and the most reliable component of capital flows to African countries (Asiedu, 2002; Asheghian, 2004; El-Wassal, 2012). In countries that historically emphasized importsubstituting industrialization – such as most of Africa, Latin America, and Southeast Asia countries – FDI was either completely prohibited or multinational firms had to operate under severe restrictions (Asiedu, 2002; Asheghian, 2004; Aregbesola, 2014). According to Aregbesola (2014), contrary to the restrictive stance towards FDI by most developing countries, licensing of foreign technology was aggressively encouraged to encourage technological development of indigenous firms, while some were encouraged to form joint ventures with local firms (Alba, Park & Wang, 2009; Culem, 1988; Billington, 1999). Asheghian (2004) observed that the rationale behind restrictive policies was aimed at weakening the bargaining position of foreign firms
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