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The determinants of foreign direct investment in sub-Saharan Africa: what role for governance?

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  • Rodríguez-Pose, Andrés
  • Cols, Gilles

Abstract

For the past quarter of a century, foreign direct investment (FDI) flows have grown exponentially across the world. Sub-Saharan Africa has, however, lagged behind and only lured on average a mere 2% of global FDI. The investment that the region attracts tends, moreover, to be concentrated in a number of commodity-rich countries. Natural resources and the size of national markets have generally been considered as the main drivers of FDI. The quality of local institutions has, by contrast, attracted less attention. This paper uses institutional data for 22 countries in order to demonstrate that the quality of governance plays a far from negligible and enduring role in the distribution of FDI in sub-Saharan Africa. It is shown that factors such as political stability, government effectiveness, lower corruption, voice and accountability, and the rule of law not only are more important determinants of FDI than the size of local markets, but also that their influence on the capacity of African countries to attract FDI is long-lasting.

Suggested Citation

  • Rodríguez-Pose, Andrés & Cols, Gilles, 2017. "The determinants of foreign direct investment in sub-Saharan Africa: what role for governance?," LSE Research Online Documents on Economics 84288, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:84288
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    Cited by:

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    2. Simplice A. Asongu & Nicholas M. Odhiambo, 2019. "Governance, capital flight and industrialisation in Africa," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 8(1), pages 1-22, December.
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    5. Tarek Bel Hadj & Adel Ghodbane, 2022. "A Moderated Mediation Model of the Effect of Foreign Direct Investments on CO2 Emissions: Panel Data Evidence from GCC Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(2), pages 904-925, June.
    6. Evangelos Rasvanis & Vassilis Tselios, 2021. "Do agglomeration economies matter where natural endowments are? Lessons from Greece," Regional Science Policy & Practice, Wiley Blackwell, vol. 13(3), pages 1009-1024, June.
    7. Federico Carril-Caccia & Juliette Milgram-Baleix & Jordi Paniagua, 2019. "Foreign Direct Investment in oil-abundant countries: The role of institutions," PLOS ONE, Public Library of Science, vol. 14(4), pages 1-23, April.
    8. Dondashe, Nandipha & Phiri, Andrew, 2018. "Determinants of FDI in South Africa: Do macroeconomic variables matter?," MPRA Paper 83636, University Library of Munich, Germany.
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    10. Waliu Olawale Shittu & Hammed Oluwaseyi Musibau & Sodiq Olaiwola Jimoh, 2022. "The complementary roles of human capital and institutional quality on natural resource - FDI—economic growth Nexus in the MENA region," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(6), pages 7936-7957, June.
    11. Federico Carril-Caccia & Juliette Milgram Baleix & Jordi Paniagua, 2019. "The foreign direct investment-institution nexus in oil-abundant countries," Working Papers 1903, Department of Applied Economics II, Universidad de Valencia.
    12. Andrew G Ross & Maktoba Omar & Anqi Xu & Samikshya Pandey, 2019. "The impact of institutional quality on Chinese foreign direct investment in Africa," Local Economy, London South Bank University, vol. 34(6), pages 572-588, September.
    13. Kimiagari, Salman & Mahbobi, Mohammad & Toolsee, Tushika, 2023. "Attracting and retaining FDI: Africa gas and oil sector," Resources Policy, Elsevier, vol. 80(C).
    14. Rios, Vicente & Gianmoena, Lisa, 2020. "The link between quality of government and regional resilience in Europe," Journal of Policy Modeling, Elsevier, vol. 42(5), pages 1064-1084.
    15. Arogundade, Sodiq & Biyase, Mduduzi & Eita, Joel H., 2021. "Foreign Direct Investment and Inclusive Human Development in Sub-Saharan African Countries: Domestic Conditions Matter," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 74(4), pages 463-498.
    16. Munjal, Surender & Varma, Sumati & Bhatnagar, Ankur, 2022. "A comparative analysis of Indian and Chinese FDI into Africa: The role of governance and alliances," Journal of Business Research, Elsevier, vol. 149(C), pages 1018-1033.

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    More about this item

    Keywords

    foreign direct investment (FDI); good governance; institutions; markets; natural resources; sub-Saharan Africa;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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