Political and institutional impediments to foreign direct investment inflows to sub‐Saharan Africa

Abstract

AbstractThis article analyzes the role of institutional factors and political stability in the inflow of foreign direct investment (FDI) to sub‐Saharan Africa (SSA). It uses cross‐sectional time series data on 40 SSA countries, and an econometric model of 12 institutional (including political risk) variables, after controlling for both traditional and policy variables. Given the role of foreign direct investment in the development process, one of the most important challenges facing Africa is how to attract an improved share of the increasing flow of world FDI. Africa's image as a high‐risk investment region has to be dispelled, as the flow of FDI is highly sensitive to economic and political risks. Fiscal incentives, the most popular instrument for attracting FDI in Africa, have failed to deliver the expected increase in FDI inflows. We believe that what is needed is not only political and macroeconomic stability but also institutional credibility. The objective of this article, therefore, is to investigate the impact of institutional factors and political risk on the inflow of FDI to SSA. The results reveal that institutional factors are important to attract FDI into SSA. © 2012 Wiley Periodicals, Inc.