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Investigating geography and institutions as determinants of foreign direct investment in Africa using panel data

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Author Info
W. A. Naudé
W. F. Krugell

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Abstract

This article uses a cross-country econometric approach to identify the determinants for foreign direct investment (FDI) in Africa. The contribution is 3-fold. Firstly, we recognize that the estimation techniques used elsewhere, such as ordinary least squares, may be flawed. We therefore use a dynamic one-step generalized method of moments (GMM) estimator due to Arellano and Bond (1991). The GMM-estimates identified a number of robust determinants of FDI, namely government consumption, inflation rate, investment, governance (political stability, accountability, regulatory burden, rule of law) and initial literacy. It is concluded that geography does not seem to have a direct influence on FDI flows to Africa. Neither market-seeking nor re-exporting motives of FDI seem to dominate, with different policy instruments being significant in the different specifications. This does not discount the importance of good policies, but probably indicates the importance of good policies made by good institutions. Institutions, in the form of political stability showed up as a significant determinant of FDI.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 39 (2007)
Issue (Month): 10 ()
Pages: 1223-1233
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Handle: RePEc:taf:applec:v:39:y:2007:i:10:p:1223-1233

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  1. Naude, Wim, 2007. "Geography and Development in Africa: Overview and Implications for Regional Cooperation," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  2. Sukhwinder Singh & Zuzana Brixiova & Thomas William Dorsey & Helaway Tadesse, 2008. "The Landscape of Capital Flows to Low-Income Countries," IMF Working Papers 08/51, International Monetary Fund. [Downloadable!]
  3. Eva Rytter Sunesen, 2009. "Examining the Regional Aspect of Foreign Direct Investment to Developing Countries," Discussion Papers 09-02, University of Copenhagen. Department of Economics. [Downloadable!]
  4. Dzhumashev, Ratbek, 2009. "Is there a direct effect of corruption on growth?," MPRA Paper 18489, University Library of Munich, Germany. [Downloadable!]
  5. Henri Bezuidenhout, 2009. "A Regional Perspective on Aid and FDI in Southern Africa," International Advances in Economic Research, Springer, vol. 15(3), pages 310-321, August. [Downloadable!] (restricted)
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