Determinants of foreign direct investment into sub-saharan Africa and its impact on economic growth.

Abstract

The aim of this research has 3 main objectives. The first objective is to examine the determinants of foreign direct investment (FDI) into Sub-Saharan Africa (SSA). This further to investigate how SSA countries compare in their FDI determinants with other countries from the Middle East and North Africa (MENA). These are the two least recipient regions of global FDI. The second objective is to examine the determinants of firm performance in SSA manufacturing firms with respect to market structure and foreign ownership. The third objective is to examine the impact of FDI on economic growth in SSA. To address the first objective, panel data techniques (pooled OLS and fixed effects) were employed on different samples of SSA and MENA countries for the time period 1996-2010. The findings revealed that return on capital, market size, infrastructure development, human capital, control of corruption, trade openness and strategic assets are important determinants of FDI in SSA. Surprisingly, natural resource endowments are not significant determinants of FDI. Also, the findings revealed that all things being equal, SSA countries will receive less FDI inflows compared to MENA countries. To achieve the second objective, OLS regression was employed on a sample of SSA manufacturing firms (garments, fabricated metals, and woods and furniture) for the period 2007. The findings showed that quality of human capital, foreign ownership, and firm size positively and significantly influence firm performance. On the other hand, competition, capital intensity, poor electricity delivery, and obstacles in accessing finance impact negatively on firm performance. Corruption and political instability (except for garments firms) have insignificant relationships with firm performance. Lastly, the third objective used panel data estimation techniques (pooled OLS, fixed effects and GMM) on a sample of SSA countries for the period 1996-2010. The findings showed that agricultural output, governance, merchandise exports, total official flows, and fixed capital formation are positive and significantly related to economic growth. External debt stock was negative and significantly related to economic growth. Surprisingly, the stock of FDI is insignificantly related to SSA economic growth. Further analyses indicate that in order to ensure that FDI impacts significantly on economic growth, minimum threshold requirements are needed in terms of education