Journal of Applied Finance & Banking

Do Institutions Quality Affect FDI Inflows in Sub-Saharan African Countries?

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  • Abstract

    This paper investigates the linkages between natural resources, institutional quality and FDI, and the interaction impact of natural resources and institutional quality on FDI. It argues that countries highly ranked with respect to institutional quality tend to do better in attracting FDI. In an empirical analysis using different econometric techniques and a data sample of 30 African Sub-Saharan countries for the period 1984-2007, the paper finds that different aspects of a country’s institutional quality are almost always significant, regardless of the other control variables used in the least-squares and instrumental variables estimations. Taking into account the interaction impact, the paper finds that when the quality of a host country's institutions is sufficiently low, further deterioration in this variable may not stimulate FDI inflows; it may instead reduce them. However, FDI inflows increase significantly when institutional quality improves. The paper also finds that the marginal effect of natural resources on FDI increases with resource abundance while institutional quality remains a factor. Interaction between the two factors is determinant in countries’ ability to compete for FDI inflows.