African Economic Conference
25-28 October 2011
Addis Ababa, Ethiopia
Revisiting the Determinants of Foreign Direct
Investment in Africa: the role of Institutions and
Policy Reforms
Gamal Ibrahim, Adam Elhiraika, Abdalla Hamdok (UNECA), Abbi
Kedir (University of Leicester)
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Outline
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Objectives and Contribution of the Paper.
Foreign Direct Investment In Africa.
Determinants of Foreign Direct Investment Flows to
Africa.
Data.
Estimation and discussion of results.
Conclusion and Policy recommendations.
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Motivation of the study

Increasing role of FDI as a source of
investment and development in Africa
and the changing global financial and
economic architecture.

Rigorous empirical literature on
determinants of FDI is still at early stages
(Blonigen, 2005) and most existing work
is statistically fragile (Chakarabarti,
2001).
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Contribution of the Paper

Use of panel data to address Common
problems in the literature such as the
unobserved country heterogeneity and
the dynamics of the FDI process.

In addition to the standard variables in
cross-country FDI regressions, the paper
examines the impact of institutions and
policy reforms on FDI Inflows to Africa.
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FDI Inflows to Africa
Average FDI Inflows in USD Millions to
African Regions
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
1970-1990
1991-2009
Eastern Africa Central Africa
Northern
Africa
Southern
Africa
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FDI Inflows as Share of the World
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FDI Inflows as Share of the World
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Classical Determinants of Foreign Direct
Investment
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The most influential motives for transnational
corporations investing in developing countries
have been market seeking and resource
seeking (Dunning, 1998).

Dunning’s work has motivated a bulk of
empirical literature on developing countries to
pinpoint the main factors which hosts
countries have to provide to secure FDI inflows
(Wernick et al., 2009; Buckley., 2008; Bevan
and Estrin, 2004, Blonigen, 2005).
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Policy reforms Determinants Literature

Focuses on the impact of business environment and trade and
financial liberalisation.
 Key determinant in the literature are:
i) Inflation
ii) Exchange rate
iii) Taxes
v) Trade and Financial liberalisation.

'sound economic policies' as synonymous to
'austere' macroeconomic policies
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Role of Governance and
Institutions
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Slow economic reforms imply that Africa is
different.
All else being equal, FDI is uniformly lower in
Africa due to weak institutions.
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Few attempts to get beyond TC analysis.
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Mixed empirical results on social development
indicators as determinant of FDI.
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Data
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Our FDI data set along with the key
explanatory variables of interest are
generated from GDF_WB (Global
Development Finance of World Bank) and
the period covered ranges from 1980 to
2009.
The panel data on Africa is merged with
the institutional variables obtained from
International Country Risk Guide (ICRG).
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Estimation and Discussion of Result

Fixed effects model
FDI it   0  1 xit   2 I it  uit
u it   i   t  vit

Dynamic Panel GMM estimator
FDI it   0  FDI it 1  1 xit   2 I it  uit
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Estimation results
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Our empirical analysis is based on fixed effects model
of net inflows of FDI expressed as a percentage of
GDP.

Market size, corruption, domestic credit interacted by
quality of bureaucracy, share of oil in exports and
religious tension risk are significant drivers of FDI
inflows in Africa
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The result highlighted that FDI to Africa is marketseeking and follow oil economies.
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Estimation Results

determinants of FDI flow to Africa,
underscore the adverse effect of weak
economic governance and political
instability as manifested in high levels of
corruption and religious tensions.

Financial development, proxied by bank
credit, is found to be conducive to FDI in
the presence of quality bureaucracy.
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Conclusion and Policy
Recommendations
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African countries should undertake policies to expand local
markets through regional integration.
Importance of credible institutional policy reforms that will
improve economic governance and political stability, particularly
by enhancing the quality of civil services, and combating
corruption and religious tensions.
African countries must take effective measures to improve the
quality of bureaucracy to ensure that financial development is
conducive for FDI.
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Thank you!
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