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The Determinants of Foreign Direct Investment in sub-Saharan Africa: What Role for Governance?

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  • Cols, Gilles
  • Rodr�guez-Pose, Andr�s

Abstract

For the past quarter of a century, foreign direct investment (FDI) flows have grown exponentially across the world. Sub-Saharan Africa has, however, lagged behind and only lured on average a mere 2% of global FDI. The investment that the region attracts tends, moreover, to be concentrated in a number of commodity-rich countries. Natural resources and the size of national markets have generally been considered as the main drivers of FDI. The quality of local institutions has, by contrast, attracted less attention. This paper uses institutional data for 22 countries in order to demonstrate that the quality of governance plays a far from negligible and enduring role in the distribution of FDI in sub-Saharan Africa. It is shown that factors such as political stability, government effectiveness, lower corruption, voice and accountability, and the rule of law not only are more important determinants of FDI than the size of local markets, but also that their influence on the capacity of African countries to attract FDI is long-lasting.

Suggested Citation

  • Cols, Gilles & Rodr�guez-Pose, Andr�s, 2017. "The Determinants of Foreign Direct Investment in sub-Saharan Africa: What Role for Governance?," CEPR Discussion Papers 12223, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12223
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    References listed on IDEAS

    as
    1. Elizabeth Asiedu, 2004. "Policy Reform and Foreign Direct Investment in Africa: Absolute Progress but Relative Decline," Development Policy Review, Overseas Development Institute, vol. 22(1), pages 41-48, January.
    2. repec:ebl:ecbull:v:6:y:2002:i:4:p:1-19 is not listed on IDEAS
    3. Asiedu, Elizabeth & Lien, Donald, 2011. "Democracy, foreign direct investment and natural resources," Journal of International Economics, Elsevier, vol. 84(1), pages 99-111, May.
    4. Cotton, Linda & Ramachandran, Vijaya, 2001. "Foreign Direct Investment in Emerging Economies: Lessons from sub-Saharan Africa," WIDER Working Paper Series 082, World Institute for Development Economic Research (UNU-WIDER).
    5. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2007. "Governance Matters VI: Aggregate and Individual Governance Indicators, 1996-2006," Policy Research Working Paper Series 4280, The World Bank.
    6. Elizabeth Asiedu, 2006. "Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability," The World Economy, Wiley Blackwell, vol. 29(1), pages 63-77, January.
    7. Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
    8. Anupam Basu & Krishna Srinivasan, 2002. "Foreign Direct Investment in Africa—Some Case Studies," IMF Working Papers 02/61, International Monetary Fund.
    9. Anthony Bende-Nabende, 2002. "Foreign direct investment determinants in Sub-Sahara Africa: A co-integration analysis," Economics Bulletin, AccessEcon, vol. 6(4), pages 1-19.
    10. Léonce Ndikumana & Sher Verick, 2008. "The Linkages Between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment in Sub-Saharan Africa," Development Policy Review, Overseas Development Institute, vol. 26(6), pages 713-726, November.
    11. Li, Quan & Resnick, Adam, 2003. "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries," International Organization, Cambridge University Press, vol. 57(01), pages 175-211, December.
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    More about this item

    Keywords

    foreign direct investment (FDI); good governance; institutions; markets; Natural resources; Sub-Saharan Africa;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • N57 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - Africa; Oceania
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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