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Does the quality of institutions matter for foreign investment concentration in Africa? Understanding the controversial role of international aid

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  • Ludovic Feulefack Kemmanang
  • Jonas Juleo Dongmo Zamké

Abstract

This article investigates how the quality of institutions shapes foreign direct investment (FDI) concentration and assesses the impact on African attractiveness, controlling the effect of bilateral aid. Based on data from 37 African countries over the period 2009–2018 and using the generalized method of moments, the paper finds that FDI concentration crowds out FDI inflows from countries other than the former colonizer, causing Africa to lose nearly three‐quarters of its potential. In contrast, investors from the old metropolis exhibit an accommodation effect on their former colonies' characteristics. Our study also finds that there is an inverse relationship between the quality of institutions and FDI concentration. Besides, bilateral aid from countries other than the former metropolis reduces FDI concentration, while bilateral aid from the former colonizer strengthens FDI concentration. Finally, the study shows that bilateral aid modulates the impact of the quality of institutions, such as aid from the former colonizer reduces the impact of the quality of institutions, while aid from other countries reinforces its marginal effect. Therefore, African countries should consider undertaking reforms to build institutions strong enough to improve their attractiveness and divest from the grip of international aid.

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  • Ludovic Feulefack Kemmanang & Jonas Juleo Dongmo Zamké, 2022. "Does the quality of institutions matter for foreign investment concentration in Africa? Understanding the controversial role of international aid," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 354-374, February.
    • Handle: RePEc:bla:rdevec:v:26:y:2022:i:1:p:354-374
    DOI: 10.1111/rode.12825
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