On the mediating effect of foreign direct investment in the relationship between governance and economic growth: evidence from selected African countries

Many studies have explored the relationship between governance and economic growth, yielding varied findings that complicate the implementation of effective policies. This study examines the mediating role of Foreign Direct Investment (FDI) in the relationship between governance indicators and economic growth (GDP per capita) across 18 African countries from 2000 to 2022. The Pedroni and Kao cointegration tests confirm the existence of long run relationships. The study used the Pooled Mean Group (PMG) method to draw empirical inferences. To verify the robustness of the PMG estimates, we employed Ordinary Least Squares (OLS), Fully Modified Ordinary Least Squares (FMOLS), and Dynamic Ordinary Least Squares (DOLS). In addition, we employed fixed effect model and structural equation modeling (SEM) are used to test the mediation effect. The long-run effect estimates indicate that voice and accountability, political stability, government effectiveness, and the rule of law significantly and positively impact GDP per capita through FDI. Robustness checks using fixed effects models and SEM validate these findings. Notably, FDI emerges as a critical mediator, enhancing the positive impacts of governance while mitigating adverse effects. Furthermore, FDI plays a dual role as both a mediator and moderator in the relationship between governance and GDP per capita, affecting how governance indicators influence economic growth. Country-specific analyses reveal differential impacts of governance indicators, suggesting that institutional reforms must align with local contexts. This study highlights the importance of institutional reforms to enhance governance quality and attract FDI, emphasizing their combined role in promoting sustainable economic growth in Africa.