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Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa

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  • Asamoah, Michael Effah
  • Adjasi, Charles K.D.
  • Alhassan, Abdul Latif

Abstract

This study examines how institutional quality moderates the relationship between macroeconomic volatility and foreign direct investment (FDI) in 40 countries in the Sub-Saharan African region over the period from 1996 to 2011. The GARCH models of Engle (1982) and Bollerslev (1986) are employed to model the volatility of macroeconomic uncertainty. The dynamic panel model estimation of Arellano and Bond (1991) and Blundell and Bond (1998) is used to analyze the relationship between foreign direct investment and the volatility of the macroeconomic variables. We find that macroeconomic uncertainty adversely affects the flow of FDI, while institutional quality also increases the flow of FDI in the presence of other control variables. The interaction between institutional quality and macroeconomic uncertainty reduces the initial negative effect exerted on the flow of FDI by economic uncertainty. Policy implications are drawn from the findings.

Suggested Citation

  • Asamoah, Michael Effah & Adjasi, Charles K.D. & Alhassan, Abdul Latif, 2016. "Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa," Economic Systems, Elsevier, vol. 40(4), pages 612-621.
    • Handle: RePEc:eee:ecosys:v:40:y:2016:i:4:p:612-621
    DOI: 10.1016/j.ecosys.2016.02.010
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