The Role Of Institutional Factors On Capital Flows To Middle-Income Sub-Saharan Africa

This paper studies the institutional factors, that tend to matter for capital inflows, for middle-income Sub-Saharan African (SSA) countries. Previous studies have focused more on macroeconomic push and pull factors and less on institutional factors. The paper aims to contribute to a better understanding of the dynamics between institutional quality and capital flows to middle-income SSA countries; with capital flows disaggregated into foreign direct investment (FDI), portfolio equity, and portfolio debt. The study found that countries that attract high capital inflows tend to have better institutional quality, although better institutional quality has not always translated to higher capital inflows. During the 1990s, the pick-up in capital inflows occurred with improvements in conflict, democratic accountability, government stability, investment profile, and law and order. However, corruption and bureaucratic quality deteriorated, indicating that these factors were likely not behind the increase in capital inflows. There are differences in dynamics depending on the type of capital flow, with portfolio debt better tracking law and order compared to the other capital flows. To our knowledge, this may be the first study of its kind to explore the institutional factors for capital flows at a disaggregated level.