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Does institutional quality matter in foreign direct investment?: Evidence from Sub-Saharan African countries

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  • Chali Nondo
  • Mulugeta S. Kahsai
  • Yohannes G. Hailu

Abstract

Using fixed effects estimation techniques, this study seeks to explain the impact of institutional quality on foreign direct investment (FDI) inflows to 45 SSA countries over the period 1996-2007. Our results show that there is no statistically significant relationship between institutional quality and FDI inflows to SSA countries. Thus, this study contradicts previous studies that have found a statistically significant association between institutional quality and FDI inflow to African countries. These results do not come as a surprise given that many SSA countries score very low on all dimensions of institutional quality. However, these findings should be interpreted very cautiously as they do not discount the importance of institutional quality in the sustainable development process of SSA. Accordingly, it is plausible that institutional quality may affect FDI indirectly by stimulating other variables, including human capital, infrastructure, and health of workers - which in turn directly affect FDI. There is also overwhelming evidence that show that a host country's natural resource endowment significantly influences FDI inflows.

Suggested Citation

  • Chali Nondo & Mulugeta S. Kahsai & Yohannes G. Hailu, 2016. "Does institutional quality matter in foreign direct investment?: Evidence from Sub-Saharan African countries," African Journal of Economic and Sustainable Development, Inderscience Enterprises Ltd, vol. 5(1), pages 12-30.
    • Handle: RePEc:ids:ajesde:v:5:y:2016:i:1:p:12-30
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    2. Yixing Yang & Md. Qamruzzaman & Mohd Ziaur Rehman & Salma Karim, 2021. "Do Tourism and Institutional Quality Asymmetrically Effects on FDI Sustainability in BIMSTEC Countries: An Application of ARDL, CS-ARDL, NARDL, and Asymmetric Causality Test," Sustainability, MDPI, vol. 13(17), pages 1-29, September.
    3. Vogiatzoglou Klimis, 2016. "Free Market Institutions and FDI Performance in Emerging Asian Economies," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 52(1), pages 43-58, December.
    4. Fisayo Fagbemi & Babafemi Oladejo & Opeoluwa A. Adeosun, 2020. "The Effectiveness of Poverty Alleviation Policy: Why is the Quality of Institutions the Bane in Nigeria?," Working Papers of the African Governance and Development Institute. 20/099, African Governance and Development Institute..
    5. Rodrigo Martins & Jorge Cerdeira & Miguel Fonseca & Mohamed Barrie, 2022. "Foreign direct investment determinants in Mano River Union countries: Micro and macro evidence," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 408-424, September.
    6. Basesa Jumanne, Bilali & Chee Keong, Choong, 2018. "Foreign Direct Investment and Natural Resources in Sub-Saharan Africa: The Role of Institutions towards the Africa We Want “2063 Vision”," African Journal of Economic Review, African Journal of Economic Review, vol. 6(1), January.
    7. Fisayo Fagbemi & Babafemi Oladejo & Opeoluwa A. Adeosun, 2020. "The Effectiveness of Poverty Alleviation Policy: Why is the Quality of Institutions the Bane in Nigeria?," Research Africa Network Working Papers 20/099, Research Africa Network (RAN).
    8. Aisha Aliyu Galadanci & Kabiru Sa’id Sufi & Chika Maureen Okaforocha & Shuaibu Jafar, 2023. "Political Leadership, Financial Efficiency and Investment Growth in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 1601-1606, October.
    9. Samuel Egbetokun & Evans S. Osabuohien & Temidayo Akinbobola, 2018. "Feasible Environmental Kuznets and Institutional Quality in North and Southern African Sub-regions," International Journal of Energy Economics and Policy, Econjournals, vol. 8(1), pages 104-115.
    10. Yosra Saidi & Anis Ochi & Samir Maktouf, 2023. "FDI inflows, economic growth, and governance quality trilogy in developing countries: A panel VAR analysis," Bulletin of Economic Research, Wiley Blackwell, vol. 75(2), pages 426-449, April.
    11. Fisayo Fagbemi & Babafemi Oladejo & Opeoluwa Adeniyi Adeosun, 2020. "The Effectiveness of Poverty Alleviation Policy: Why Is the Quality of Institutions the Bane in Nigeria?," Review of Development and Change, , vol. 25(2), pages 215-236, December.

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