The motives for inward FDI into Sub-Saharan African countries

Abstract

This study contributes to the FDI literature by investigating the impact of all four locational motives of FDI in Sub-Saharan African (SSA) countries for the period 1996 -2010. To achieve this aim, panel data techniques (pooled OLS, fixed effects and GMM) were employed on a sample of SSA countries. The empirical results showed that efficiency and strategic asset seeking factors influenced FDI activities in SSA for the period investigated. Market size also influenced FDI however this was less robust to specifications. Surprisingly, FDI in SSA was not resource seeking. Furthermore, a statistical test confirmed structural and behavioural differences in FDI determinants between SSA sub-regional groups and when analysed separately, FDI in West and Central SSA was market and efficiency seeking while FDI in South and East Africa was best explained by efficiency seeking factors. Based on the empirical findings, a number of policy implications were derived. These policy implications include further implementation of policies targeted at increasing and sustaining trade liberalisation and trade diversification, control of corruption, credible upgrades and productive investments in infrastructure, and support for human capital accumulation as FDI is increasingly directed towards R&D, innovation and strategic asset activities.

Multilateral Trade Liberalisation and Foreign Direct Investment Inflows

“…This argument rests on the idea that the larger the host country's market, the greater are the prospects for higher demand within the economy and consequently the prospects for FDI in order to meet this demand (see also Boateng et al ). This argument has been supported by a number of studies – including those of Chakrabarti (), Asiedu (), Fedderke and Romm (), Moosa and Cardak (), Boateng et al (), and Okafor et al () – which find that the host country's market size positively influences FDI inflows. Similarly, an increase in the size of the host country's market, including through its GDP growth rates, may signal high investment returns and, hence, attract further (foreign) investment (see e.g.…”

Democratic Capital, Democratic Rights and FDI in Sub‐Saharan Africa

“…The fourth factor is the ratio of ore and metal exports as a percentage of merchandise exports ( OME ). A high reliance on commodity exports can negatively affect FDI inflows by ‘crowding out’ investment in non‐resource industries resulting in cyclical currency appreciation (Okafor et al ., ), as well as increasing the durability of authoritarian regimes where the government controls the extraction or monopolises the revenues to prevent the emergence of economically independent opposition groups (Wantchekon & Jensen, ; Asiedu & Lien, ). Hence, a high proportion of commodity exports are anticipated to negatively affect FDI flows and democratisation.…”

“…Despite these significant limitations, SSA has received an increasing share of global FDI, albeit from a very low base, rising from an average of just $14.5 billion in the 1980s to $297 billion in the last decade (or an average of 1.2 to 1.6 per cent of global FDI flows, respectively). However, these inflows are mainly concentrated in the five resource rich countries of South Africa, Nigeria, Sudan, Democratic Republic of Congo and Angola (Okafor, Piesse, & Webster, : 878).…”

Does Trade Openness Contribute to Driving Financing Flows for Development?

“…Concerning resource-seeking factor, we use resource rents to capture the availability of resources (see for e.g., Edison and Reinhart, 2001;and Prasad et al, 2003;Asiedu, 2006;Okafor et al, 2015). Important rents from natural resources indicate the availability of abundant and low cost natural resources in the host country.…”