Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007

Abstract

The central concern of this paper is to respond to the question: what determines FDI inflows to Africa? An understanding of such factors will assist African policymakers to formulate and execute policies for attracting FDI. Our estimation results from a panel of seven five-year non-overlapping windows for the period 1980-2007 indicate that: (i) there is a positive relationship between market size and FDI inflows; (ii) openness to trade has a positive impact on FDI flows; (iii) higher financial development has negative effect on FDI inflows; (iv) high government consumption expenditure attracts FDI inflows to Africa; (v) higher FDI goes where international remittances also goes in Africa; (vi) agglomeration has a strong positive impact on FDI inflows to Africa; (vii) natural resource endowment and exploitation (especially for oil) attracts huge FDI into Africa; (viii) East and Southern African sub-regions appear positively disposed to obtain higher levels of inward FDI. The key policy implications are discussed.