Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability

15 Pages Posted: 12 Apr 2006

See all articles by Elizabeth Asiedu

Elizabeth Asiedu

University of Kansas - Department of Economics

Multiple version iconThere are 2 versions of this paper

Abstract

Data from several investor surveys suggest that macroeconomic instability, investment restrictions, corruption and political instability have a negative impact on foreign direct investment (FDI) to Africa. However, the relationship between FDI and these country characteristics has not been studied. This paper uses panel data for 22 countries over the period 1984-2000 to examine the impact of natural resources, market size, government policies, political instability and the quality of the host country's institutions on FDI. It also analyses the importance of natural resources and market size government policy and the host country's institutions in directing FDI flows. The main result is that natural resources and large markets promote FDI. However, lower inflation, good infrastructure, an educated population, openness to FDI, less corruption, political stability and a reliable legal system have a similar effect. A benchmark specification shows that a decline in the corruption from the level of Nigeria to that of South Africa has the same positive effect on FDI as increasing the share of fuels and minerals in total exports by about 35 per cent. These results suggest that countries that are small or lack natural resources can attract FDI by improving their institutions and policy environment.

Suggested Citation

Asiedu, Elizabeth, Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. The World Economy, Vol. 29, No. 1, pp. 63-77, January 2006. Available at SSRN: https://ssrn.com/abstract=875105 or http://dx.doi.org/10.1111/j.1467-9701.2006.00758.x

Elizabeth Asiedu (Contact Author)

University of Kansas - Department of Economics ( email )

1300 Sunnyside Drive
Lawrence, KS 66045-7585
United States
785-864-3501 (Phone)
785-864-5270 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
29
Abstract Views
6,529
PlumX Metrics