Foreign direct investment and institutional: new granger causailty evidence from African countries

Abstract

The strategic importance of foreign direct investment in the contemporary economies has been tremendous. While various countries (developed and developing economies) have benefitted from the direct and spillover effects of FDI, which range from improved technology and knowledge diffusion through to individual and corporate capability enhancement, FDI outflow remains largely channelled to the developed countries, and the rapidly developing countries in Asia and South America. Evidence suggests that the development-enhancing effects of FDI are felt more highly in the developing economies, such as economies in Africa. However, FDI inflow to the developing economies has been very low. Using data generated from the African Development Indicators (ADI) between 1980 and 2008 in econometric estimations, this paper finds that government policies (especially fiscal and monetary policies) play significant roles in facilitating FDI inflow to the African countries studied. The study thereby suggests an improved regulatory framework to make Africa more attractive to inflow of FDI.