Quality of Institutions, Natural Resources and Foreign Direct Investment (FDI) in Sub-Saharan Africa: Dynamic Approach
Komlan Fiodendji, Ph.D

One of the problems which sub-Saharan African (SSA) countries are confronted with is low levels of investment. Yet, the theory of capital tells us that it is impossible to envisage development without a considerable accumulation of capital. An important channel through which those countries can solve the problem is to resort to foreign direct investment (FDI), especially now that we know the considerable role which such investment played in the development of the economy of several Asian countries. Sub-Saharan African countries have not benefited enough from such a type of investment. There are many reasons behind this, and they vary from country to country and region to region. One of these reasons is the quality of institutions. That is why the present study, using dynamic panel data, set out to identify the role of quality of institutions on the flows of foreign investment in SSA countries, according to certain characteristics of countries (resource intensive countries and non-resource intensive countries). Based on a dynamic panel data set for 30 SSA countries, over the period 1984-2007, our paper finds that different aspects of a country’s institutional quality are almost always significant, regardless of the other control variables. Taking into account the interaction impact, we find that the impact of institutional quality on FDI depends on the importance of natural resources in the host country. Institutional quality promotes FDI in countries where the natural resources are abundant, but has a negative effect on FDI in natural resources intensive countries.The paper also finds that, the marginal effect of natural resources on FDI increases with resource abundance while institutional quality remains a factor. Interaction between the two factors is determinant in countries’ ability to compete for FDI inflows.

Full Text: PDF     DOI: 10.15640/jeds.v4n2a3