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Do Institutions Quality Affect FDI Inflows in Sub Saharan African Countries?

Fiodendji, Daniel Komlan (2013): Do Institutions Quality Affect FDI Inflows in Sub Saharan African Countries?

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Abstract

One of the problems which sub-Saharan African (SSA) countries are confronted with is the low level of investment. Yet, the theory of capital tells us that it is impossible to envisage development without a considerable accumulation of capital. An important channel through which those countries can solve this capital issue is to resort to foreign direct investment (FDI), especially knowing the considerable role such investment played in the development of the economy of several Asian countries. Sub-Saharan African countries have not benefited enough from such a type of investment form many reasons. One of them is the quality of institutions. This paper investigates the linkages between political risk, institutional quality and FDI using different econometric techniques for a data sample of 30 African Sub-Saharan countries from period 1984 to 2007. This paper argues that countries whose governments are highly ranked according to various indices of the quality of institutions tend to do better in attracting FDI. In an empirical analysis of cross-section data, the paper finds that different aspects of the quality of institutions of a country (corruption, law and order, government stability, profile of investment, internal and external conflicts etc...) are almost always significant, regardless of the other control variables that are used in the least-squares and instrumental variables estimation. By using the interaction approaches, we find that when a host country's institutions qualities are sufficiently low, a further decrease in institutions may not stimulate and, in fact, may even decrease FDI inflows. In addition, FDI inflows significantly rise as the institutions quality become better. We also find that the marginal effect of natural resources on FDI depends on the level of resources abundance; i.e., when a country is resource-intensive, the marginal effect of natural resource on FDI inflows increases. In the non resource-intensive countries, natural resources might be more effective to attract FDI. Our results suggest that the institutional quality competition between FDI host countries may have different impacts on countries with different natural resource levels. Thus, the ability of a country to benefit from financial globalization and its vulnerability to financial crises can be significantly affected by the quality of its domestic institutions and its macroeconomic framework.

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