The dual effect of (Extractive) foreign direct investment on institutional quality in sub-Saharan Africa

The present study examines the dual impact of foreign direct investment (FDI), with a particular focus on extractive FDI, on institutional quality in Sub-Saharan Africa. While there is a broad consensus that foreign direct investment can promote economic growth, concerns have been raised regarding its impact on governance and institutions, particularly with regard to the possibility of a deterioration in governance resulting from the allocation of resources. In addressing this gap, the research employs a panel dataset of 44 countries from 1996 to 2021, utilising panel vector autoregression econometric models that incorporate interactions between extractive FDI and institutional indicators. The findings reveal a nuanced relationship : extractive FDI can strengthen institutions when complemented by effective regulatory frameworks, but may undermine governance if institutions are weak or captured by elites, leading to increased corruption and resource dependence. The findings of this study indicate that the quality of institutions exerts a moderating influence on the impact of FDI, underscoring the significance of policy and governance reforms in order to optimise developmental benefits. The study provides critical insights into how developing countries with abundant natural resources can leverage FDI for the purpose of institutional development. The necessity for the implementation of robust governance frameworks and sustainable policies is emphasised. The present study elucidates the conditions under which FDI influences institutional quality, thereby contributing to the extant literature on resource-led growth and governance in resource-dependent economies.