The non-linear effect of foreign direct investment on the informal economy in sub-Saharan African countries: An approach using the Method of Moments Quantile Regression

A number of studies have empirically analysed the effect of foreign direct investment on the informal economy. However, these studies have been limited to a regression framework in which the analysis focuses on the average effects of foreign direct investment, omitting that the relationship may be non-linear. In this study, we use quantile-moment regression to examine the non-linear effect of foreign direct investment on the informal economy in African countries. The results show that inward foreign direct investment has an inverted U-shaped relationship with the informal economy, and that the amount of foreign direct investment flows to reach the threshold is more considerable for countries with a small informal economy. Hence it is advantageous for African countries to set up policies to control the informal economy that take into account the quantity of inward foreign direct investment flows, by putting in place mechanisms that allow the acceleration of financial development that encourages inward foreign direct investment flows.