Understanding foreign direct investment in the southern African development community: an analysis based on project‐level data

Abstract

AbstractThis article uses a uniquely rich project‐level data set to analyze determinants and trends of foreign direct investment (FDI) flows to the Southern African Development Community region. We control for the source of the investment, the sector in which the investment is undertaken, and the investment type in addition to project size. The results indicate market size to have a positive impact on FDI flows under all specifications—a result consistent with earlier studies. Other variables are unstable depending on specification and the subset of the data used. Furthermore, we find no significant differences in factors that drive FDI flows by source country, while greenfield investments are seen to respond more to the growth potential of the market relative to other forms of investment. In general, we find macroeconomic variables to be poor at explaining project‐level FDI in the region. The descriptive analysis of the data points us more in the direction of the gravity model, with factors such as colonial ties and proximity of the investing country appearing to matter. Limited flows and minimal sectoral diversity call for enhanced investment promotion and collaborative efforts among member states.