On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?
University of Kansas - Department of Economics
This paper analyzes the determinants of Foreign Direct Investment (FDI) to developing countries and examines why Sub-Saharan Africa (SSA) has been relatively unsuccessful in attracting FDI despite policy reform. The results indicate that the factors that drive FDI have a differential impact on FDI flows to SSA. Specifically, infrastructure development and a higher return on capital promote FDI to non-SSA countries. In contrast these factors have no effect on FDI to SSA. Openness to trade promotes FDI to both SSA and non-SSA countries, however, the marginal benefit from increased openness is less for SSA-suggesting that trade liberalization will generate more FDI to non-SSA countries than SSA countries. Another important finding is that there is an "adverse regional effect" for SSA: a country in SSA will receive less FDI by virtue of its geographical location. These results suggest that Africa is different!
Number of Pages in PDF File: 24
Keywords: Africa, Foreign Direct Investment, Developing Countries
JEL Classification: F23, O55, G32
Date posted: September 11, 2001