Working Paper 335 - Intra-African Foreign Direct Investment (FDI) and Employment: A Case Study

Most foreign direct investment (FDI) into Africa is currently concentrated on natural resources, but investment in non-resource-based FDI, and in particular, FDI in manufacturing, generates more jobs and has the potential to alleviate the continent's unemployment problem. The key factors that drive intra-African FDI can be analyzed by focusing on investments from South African multinationals to other African countries. This paper does so using a panel-corrected standard errors estimator with a firm-level FDI dataset for 2003-2016. The results suggest that market attractiveness has a positive impact on intra-regional FDI, while business regulations have an adverse effect. Doubling GDP per capita or doubling the share of labor force is expected to increase South African FDI by about 31% or 46%, respectively. Inversely, for host countries, an increase in the capital requirement, the lack of legal rights, or the tax burden is expected to reduce FDI by about 31%, 62%, or 17%, respectively. However, a reduction in legal rights from the median country level to that of the least restrictive country and a decrease in the tax burden from the median country level to that of the least restrictive country should raise South African FDI by 59% and 31%, respectively. Overall, these results underline the adverse impact of business regulations on intra-regional investment flows and suggest that policies that foster economic growth, promote higher per capita incomes, expand the labor force, and improve the business environment in African countries will facilitate intra-regional FDI.