Does Institutional Development attract Foreign Direct Investments in Sub-Saharan Africa? A Dynamic Panel Analysis

Abstract

This study focuses on institutional development in 45 sub-Saharan African countries as an integral part towards attracting FDI in the region. To control endogeneity of variables, the study used the system Generalized Method of Moment (GMM) estimator for the data collected from 1986 to 2015. Institutional development is represented by six governance proxies (i.e.  Voice and accountability, regulatory quality, rule of law, political stability and absence of violence, corruption, and government effectiveness). The findings show that only the rule of law and government effectiveness (i.e. institutional development) indicators have positive and statistically significant effects in attracting FDI inflows in sub-Saharan Africa. Further, trade openness and market size continue to play a strong and major impact in sub-Saharan Africa’s ability to attract FDI inflows. Institutional Theory and Institutional FDI Fitness Theory are also supported by the study's findings. The study suggests that the region should maintain a high level of rule of law and government effectiveness in order to continue attracting FDI inflows.